Tax Facts on Capital Gains and Losses

Understanding capital gains and losses is essential for effective tax planning and compliance. Here are some key tax facts regarding capital gains and losses:

What Are Capital Gains and Losses?

1. Capital Gains: These occur when you sell an asset for more than its purchase price. For example, if you bought stock for $1,000 and sold it for $1,500, you would have a capital gain of $500.
2. Capital Losses: These occur when you sell an asset for less than its purchase price. Using the same example, if you sold stock for $800, you would have a capital loss of $200.

Types of Capital Gains

1. Short-Term Capital Gains: Gains from assets held for one year or less are considered short-term and are taxed at your ordinary income tax rates.
2. Long-Term Capital Gains: Gains from assets held for more than one year are considered long-term and typically taxed at reduced rates (0%, 15%, or 20%) based on your income level.

Tax Rates on Capital Gains

1. Long-Term Capital Gains Rates:
   1. 0%: For single filers with taxable income up to $44,625 (2023).
   2. 15%: For single filers with taxable income between $44,626 and $492,300.
   3. 20%: For single filers with taxable income over $492,300.
2. (Rates vary for married couples and head-of-household filers.)
3. Net Investment Income Tax (NIIT): High-income earners may also be subject to a 3.8% NIIT on capital gains.

Offsetting Gains and Losses

1. Netting Gains and Losses: You can offset capital gains with capital losses. Short-term and long-term gains must be netted separately. For example, if you have a $1,000 short-term gain and a $400 short-term loss, you only pay tax on the net short-term gain of $600.
2. Carryover of Losses: If your capital losses exceed your capital gains, you can deduct up to $3,000 ($1,500 if married filing separately) against other income, such as wages. Any remaining losses can be carried forward to future tax years.

Special Considerations

1. Primary Residence Exclusion: If you sell your primary home, you may be able to exclude up to $250,000 ($500,000 for married couples) of capital gains from taxation, provided you meet certain ownership and use requirements.
2. Inherited Assets: Inherited assets generally receive a step-up in basis, meaning their value is adjusted to the fair market value at the time of the decedent's death, potentially reducing capital gains when sold.
3. Like-Kind Exchange: Certain real estate transactions may qualify for a like-kind exchange, allowing you to defer capital gains taxes if you reinvest the proceeds into a similar property.

Reporting Requirements

1. Form 8949 and Schedule D: Individuals must report capital gains and losses on Form 8949 and summarize the totals on Schedule D of their tax return.
2. Brokerage Statements: Most brokers will provide a Form 1099-B, which details your capital gains and losses for the year. Ensure that this information is accurate when filing your taxes.

Record-Keeping

1. Keep Detailed Records: Maintain records of your purchase price, dates of acquisition and sale, and any associated costs (like commissions or improvements) that can affect your asset's basis for accurate reporting.