Understanding capital gains and losses

Capital assets include a home, household furnishings and stocks and bonds held in a personal account. When a capital asset is sold, the difference between the amount you paid for the asset and the amount you sold it for is a capital gain or capital loss. Here are some facts from the IRS about gains and losses and how they affect your federal income-tax return.

Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.

When you sell a capital asset, the difference between the amounts you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss.

For example: You buy 100 shares of XYZ at $35, paying $3,500 plus a brokerage commission of $20. Your basis is $3,520. Later, you sell when the stock is at $39. You receive $3,900 minus a brokerage commission of $20, so your amount realized is $3,880. Your capital gain is $3,880 minus $3,520, or $360.

Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it for more than one year, your capital gain is long-term. If you hold it for one year or less, your capital gain or loss is short-term.

If you have long-term gains in excess of your long-term losses, you have a net capital gain.

The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2025, there is a 20-percent capital-gains rate for higher-income taxpayers that are subject to the 37-percent income-tax rate. The capital gains rate for most people is 15 percent.

High-income taxpayers may have a 3.8-percent unearned Medicare-contribution tax applied to their capital gains and other net investment income. Thus, the highest tax rate that could apply to capital gains is 37+3.8 = 40.8 percent on short-term gains or 23.8 percent (20+3.8) on long-term gains.

If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.

If your total net capital loss is more than the yearly limit on capital-loss deductions, you can carry over the unused part to the following year.

Capital gains and losses are reported on Form 8949 and Schedule D, Capital Gains and Losses, and then transferred to the Form 1040.

For more information about reporting capital gains and losses, refer to IRS Publication 550, "Investment Income and Expenses."

Barry Lisak is an IRS enrolled agent specializing in personal and small business taxes for 30 years. Any questions can be directed to him at 516-829-7283, or mrbarrytax@aol.com.