Tax on Capital Gains

The term Capital Gain means the profit realized from the sale or disposition of a Capital Asset. The IRS considers a Capital Asset almost everything you own, whether for personal use or investment purposes.

At the time you sell or dispose of a Capital Asset, the difference between the amount realized from the disposition of the asset and the original basis (in some cases what you paid) results in a Capital Gains or Loss.

Capital Assets subject to Capital Gains

The Sale or disposition of certain capital assets may result in the realization of a Capital Loss or Capital Gain, and it is subject to reporting to the IRS.

Some those assets generally are:

Stocks, Bonds, and other Investment Securities, precious metals, and real property held for investment, as well as equipment and vehicles.

Short Term and Long Term Capital Gains

Capital Gains and Losses are classified as either Long Term or Short Term, depending how long the property was held at the time of sale or disposition. Property held for one year or less is considered Short Term Capital Gain or Loss. Property held for more than one year (at least one year plus one day) is considered Long Term Capital Gain or Loss.

If you have incurred both Short Term and Long Term capital gains and losses, your Net Capital Gain will be the result of the computation of both.

Limitations on Capital Losses

When Capital Losses for a given return year exceed Capital Gains, the excess is subject to a limitation of $3,000 per year per couple, and $1500 for single, or married filing separately. The unused amount can be carried over in following years.

Capital Gain on the sale of real estate used as personal residence

A capital gain realized from the sale of your personal residence in which you have live for at least two of the last five years is subject to an exclusion from capital gain tax as follows: A personal exemption of $250,000, and $500,000 for certain joint returns)

Tax on Capital Gains

Long Capital Gains receive beneficial tax rates, generally lower than the tax rates that apply to ordinary income.

Calculating Capital Gains

All Capital Gains must be calculated and reported. However; you are allowed to deduct Capital Losses only on investment property. Capital Gains and Losses are reported on Schedule D and then summarized on Form 1040.

The first step in determining a capital gain is calculating the “basis” of the property that was sold or disposed of. The computation includes depreciation, allowable expenses, and the cost of disposition of the property. The process is very complex, and will significantly impact the final computation of the Net Capital Gain or Loss, and therefore your tax liability derived from the transaction.

Getting expert financial help

The computation of Net Capital Gain is the result of careful accounting, depreciation schedules, and complex calculations, and therefore, it is crucial to rely on the expertise of a CPA when attempting to compute a Capital Gain or Loss on the disposition of assets.