Almost everything owned and used for personal or investment purposes is a capital asset. Examples are a home, household furnishings, and stocks or bonds held in a personal account. When a capital asset is sold, the difference between the basis in the asset and the amount it is sold for is a capital gain or a capital loss. You have a capital gain if you sell the asset for more than your basis. You have a capital loss if you sell the asset for less than your basis. Losses from the sale of personal-use property, such as your home or car, are not deductible.
Capital gains and losses are classified as long-term or short-term. If you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
Capital gains and deductible capital losses are reported on Form 1040. If you have a net capital gain, that gain may be taxed at a lower tax rate than the ordinary income tax rates. The term "net capital gain" means the amount by which your net long-term capital gain for the year is more than the sum of your net short-term capital loss and any long-term capital loss carried over from the previous year. Net capital gains are taxed at different rates depending on overall taxable income, although some or all net capital gain may be taxed at 0%, if an individual is in the 10% or 15% marginal tax bracket. Capital gains rates for individual increase to 15% for those individuals in the 25% - 35% marginal tax brackets and increase even further to 20% for those individuals in the 39.6% marginal tax bracket.
Net capital gain from selling collectibles (such as coins or art) is taxed at a maximum 28% rate.
The taxable part of a gain from selling Internal Revenue Code Section 1202 qualified small business stock is taxed at a maximum 28% rate. Specifically, for individual taxpayers, gross income does not include 50% of any gain from the sale or exchange of “qualified small business stock” held for more than 5 years. The remaining 50% is taxed up to 28%.
The part of any net capital gain from selling Section 1250 real property that is required to be recaptured in excess of straight-line depreciation is taxed at a maximum 25% rate.
If you have a taxable capital gain, you may be required to make estimated tax payments. Refer to IRS Publication 505, Tax Withholding and Estimated Tax, for additional information.
The table below indicates capital gains rates for 2014.
Short-term capital gains.
One year or less.
Ordinary income tax rates, up to 39.6%.
Long-term capital gains.
More than one year.
0% for taxpayers in the 10% and 15% tax brackets.
15% for taxpayers in the 25%, 28%, 33% and 35% tax brackets.
20% for taxpayers in the 39.6% bracket.
More than one year.
Section 1202 qualified small business stock.
More than five years.
Unrecaptured § 1250 Gain, (gains on real property attributable to straight-line depreciation).
More than one year.
Effective for year 2013 and after, the Health Care Act of 2010 imposed an additional 3.8% net investment income tax (NIIT) on certain individual’s investment income. Hence, it is possible that an individual’s federal tax on capital gain could be as high as 23.8% (20% + 3.8% NIIT).
If your capital losses exceed your capital gains, the amount of the excess loss that can be claimed is the lesser of $3,000, ($1,500 if you are married filing separately) or your total net loss as shown on line 16 of the Form 1040 Schedule D, Capital Gains and Loses. If your net capital loss is more than this limit, you can carry the loss forward to later years. Use the Capital Loss Carryover Worksheet in Publication 550, to figure the amount carried forward.
To learn how to put capital gains to work for you, and to find new tax deductions, we suggest that you read the monthly articles published online at the Bradford Tax Institute. We provide cutting-edge tax information for the self-employed, the one owner business, and the husband and wife owned business.
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