Capital Gains and Losses

What is a capital asset, and how much tax do you have to pay when you sell one at a profit? Find out how to report your capital gains and losses on your tax return with these tips from TurboTax.

• What is a capital gain?
• What's the difference between a short-term and long-term capital gain?
• What is the holding period?

• How much do I have to pay?
• What is a capital loss?
• Can I deduct my capital losses?

Key Takeaways

• A capital gain is the profit you receive when you sell a capital asset, which is property such as stocks, bonds, mutual fund shares and real estate.
• Short-term gains come from the sale of assets you have owned for one year or less. They are typically taxed at ordinary income tax rates, as high as 37% in 2023 and 2024.
• Long-term gains come from the sale of assets you have owned for more than one year. They are typically taxed at either 0%, 15%, or 20% for 2023 and 2024, depending on your tax bracket.
• A capital loss is a loss on the sale of a capital asset such as a stock, bond, mutual fund or real estate and can typically be used to offset other capital gains or other income.

What is a capital gain?

A capital gain is the profit you receive when you sell a capital asset, which is property such as stocks, bonds, mutual fund shares and real estate. Special rules apply to certain asset sales such as your primary residence.

What's the difference between a short-term and long-term capital gain?

There's a very big difference. The tax law divides capital gains into two main classes determined by the calendar.

1. Short-term gains come from the sale of property owned one year or less and are typically taxed at your maximum tax rate, as high as 37% in 2023 and 2024.
2. Long-term gains come from the sale of property held more than one year and are typically taxed at either 0%, 15%, or 20% for 2023 and 2024.

What is the holding period?

The holding period is the amount of time that you own the property before you sell it. When figuring the holding period, the day you buy property does not count, but the day you sell it does.

So, if you bought a stock on March 20, 2022, your holding period began on March 21, 2022. Thus, March 20, 2023 would mark one year of ownership for tax purposes.

• If you sold on March 20, you would have a short-term capital gain or loss.
• A sale one day later on March 21 would produce long-term capital gain or loss tax consequences, since you would have held the asset for more than one year.

TurboTax Tip:

Losses on your investments are first used to offset capital gains of the same type. Short-term losses are first deducted against short-term gains, and long-term losses are first deducted against long-term gains.

How much do I have to pay?

The tax rate you pay depends on whether your gain is short-term or long-term.

• Short-term profits are usually taxed at your maximum tax rate, just like your salary, up to 37% and could even be subject to the additional 3.8% Medicare surtax, depending on your income level.
• Long-term gains are treated much better. Long-term gains are taxed at 0%, 15% or 20% depending on your taxable income and filing status.
• Long-term gains on collectibles—such as stamps, antiques and coins—are taxed at 28%, or at your ordinary-income tax rate if lower.
• Gains on real estate that are attributable to depreciation—since depreciation deductions reduce your cost basis, they also increase your profit dollar for dollar—are taxed at 25%, or at your ordinary-income tax rate if lower.
• Long-term gains from stock sales by children under age 19—under age 24 if they are full-time students—may not qualify for the 0% rate because of the Kiddie Tax rules. (When these rules apply, the child’s gains may be taxed at the parents’ higher rates.)

What is a capital loss?

A capital loss is a loss on the sale of a capital asset such as a stock, bond, mutual fund or investment real estate. As with capital gains, capital losses are divided by the calendar into short- and long-term losses.

Can I deduct my capital losses?

Yes, but there are limits. Losses on your investments are first used to offset capital gains of the same type. So, short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain.

• If you have $2,000 of short-term loss and only $1,000 of short-term gain, the net $1,000 short-term loss can be deducted against your net long-term gain (assuming you have one).
• If you have an overall net capital loss for the year, you can deduct up to $3,000 of that loss against other kinds of income, including your salary and interest income.
• Any excess net capital loss can be carried over to subsequent years to be deducted against capital gains and against up to $3,000 of other kinds of income.
• If you use married filing separate filing status, however, the annual net capital loss deduction limit is only $1,500.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

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