Capital Gain or Loss
When you sell a capital asset, the difference between the amount you sell it for and your Adjusted Basis (see Basis) is a capital gain or a capital loss.1 (See Capital Asset.)
Note: capital gains and losses can also occur when you dispose of assets in other ways, e.g., by exchanging one asset for another. (See also Tax-deferred Exchange.) However, selling an asset is the most common way to trigger a capital gain or loss.
Long-term vs. short-term. Capital gain or loss is either long-term or short-term, depending on how long you hold the property before you sell it. The length of time you hold property is called your Holding Period. To figure the holding period, begin counting on the day after you received the property and include the day you disposed of it.2
If your holding period is for more than one year, your capital gain or loss is long-term. If your holding period is for one year or less, your capital gain or loss is short-term.3
You must net your capital gains and losses against each other as the end of the Tax Year as follows:
Net your short-term capital gains and losses against each other to produce either net short-term capital gain or loss.
Net your long-term capital gains and losses against each other to produce either net long-term capital gain or loss.
Report capital gains and deductible capital losses on Form 1040, Schedule D. If you have a net capital gain, i.e., net long-term capital gain exceeds net short-term capital loss,4 that gain may be taxed at a lower tax rate than the ordinary income tax rates. As of 2011, net capital gain is generally taxed at rates no higher than 15 percent.5
Business property gets special treatment. Your depreciable business property and any real property you use in your business are excluded from the definition of Capital Asset. However, if you hold these types of property for more than one year before you sell them, the tax code provides special preferential treatment: net gain is taxed as long-term capital gain and net loss is taxed as ordinary loss.6
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1 IRC Section 1001(a); IRC Section 1222.
2 IRS Publication 544, “Sales and Other Dispositions of Assets” (2010), page 36.
3 IRC Section 1222(1)-(4).
4 IRC Section 1222(11).
5 IRC Section 1(h).
6 IRC Section 1231.
