If you're an investor who makes money by buying and selling stocks, you may owe capital gains tax when you file your tax return this year. If you lost money, you may be able to deduct that loss and reduce your income. Here's what you need to know about capital gains tax:
Capital Gains and Losses Defined
A capital gain or loss is the difference between your basis - the amount you paid for the asset - and the amount you receive when you sell an asset. All capital gains (or losses) must be reported on your tax return.
Losses Limited to $3,000
If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return to reduce other income, such as wages. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.
Carryover of Losses Allowed
If your net capital loss exceeds the limit you can deduct for the year, the IRS allows you to carry the excess into the next year, deducting it on that year’s return..
Long and Short Term Gains and Losses
Capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. The long-term capital gains tax rate is 0%, 15% or 20% depending on your taxable income and filing status. Note Some investors may owe an additional 3.8% depending on income thresholds.
If you hold it one year or less, your capital gain or loss is short-term. The short-term capital gains tax rate equals your ordinary income tax rate— your tax bracket.
Net Capital Gain
If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain. Subtract any short-term losses from the net capital gain to calculate the amount of net capital gain you must report.
How to minimize capital gains taxes
Hold on
Whenever possible, hold an asset for a year or longer so you can qualify for the long-term capital gains tax rate, since it's significantly lower than the short-term capital gains rate for most assets. Our capital gains tax calculator shows how much that could save.
Exclude home sales
To qualify, you must have owned your home and used it as your main residence for at least two years in the five-year period before you sell it. You also must not have excluded another home from capital gains in the two-year period before the home sale. If you meet those rules, you can exclude up to $250,000 in gains from a home sale if you’re single and up to $500,000 if you’re married filing jointly.
Use tax-advantaged accounts
These include 401(k) plans, individual retirement accounts and 529 college savings accounts, in which the investments grow tax-free or tax-deferred. That means you don’t have to pay capital gains tax if you sell investments within these accounts.
Reporting Capital Gains and Losses
Report capital gains or losses using Form 8949, Sales and Other Dispositions of Capital Assets and Schedule D (Form 1040), Capital Gains and Losses to summarize capital gains and losses.
Please our CPA office if you need more information about reporting capital gains and losses.
