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Capital Gains, Losses and Taxes

Any asset you own or investment you make is considered a capital asset. If you sell a capital asset, the difference between the amount you paid for that asset and the amount you made selling it, is the capital gain or the capital loss. Capital assets include all assets that a taxpayer owes including all movable and immovable assets, business property, and intangible assets. Examples of capital assets are home, land, vehicles, stocks and bonds held as investment, and home furnishings.

Capital Gains and Losses and TaxesTaxpayers need to report all capital gains from the sale of capital assets. Capital losses, however, can only be deducted if they are from the sale of investment property and not from property held for personal use.

Capital Gains Tax Rate

Capital gains and losses are categorized as long-term and short-term. A capital gain or loss is viewed as long-term if it is owned by the taxpayer for more than one year. If it is owned for less than one year, it is considered short-term.

Taxes charged on capital gains are usually less than those charged on other income. Depending upon the income, the tax rate for capital gains can vary. For 2015, the capital gains rate for long-term capital gains for most taxpayers is between 15% and 33%. For lower-income groups, it is 10%, and for higher income taxpayers 35%-39.6%.

Taxes on the net short-term capital gains are charged at the same rate as ordinary income. If you owe taxes on capital gains, you may need to make estimated tax payments even if you have your taxes withheld by your employer.

Deducting Capital Losses

Capital losses can be deducted on the tax return to lower the overall liability. Capital losses can be claimed on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040. Form 8949, Sales and Other Dispositions of Capital Assets can also be used for reporting capital losses.

The annual limit for the deduction on capital losses is $3,000, or $1,500 if you file as married filing separately. If your capital losses exceed your capital gains for more than $3,000 in a year, you can carry the balance over to the next year. In the next year, the balance will be treated as being incurred in that year. Taxpayers may use Capital Loss Carryover Worksheet in Publication 550, Investment Income and Expenses, or Form 1040, Schedule D Instructions to calculate the amount to carry forward.