[Updated with 2011-2012 data] Here are some useful facts & figures to be aware of, from various IRS publications, when it comes to capital gains and losses. Also included are the latest CGT deduction and tax rates.
Almost everything you own and use for personal or investment purposes is a capital asset. Examples are your home, investment properties, stocks, options or bonds held in your personal account. When you sell a capital asset, the difference between the amount you sell it for and your (cost) basis, which is usually what you paid for it, is a capital gain or a capital loss. Capital gains are offset again capital losses, so your net capital gain/loss is the key figure to use in your tax planning.
- If your capital losses are more than your capital gains, you can claim a capital loss deduction. Your allowable deduction is $3,000 ($1,500 if you are married and filing separately). You can use your total net loss to reduce your ordinary taxable income up to the $3,000 limit. So make sure at the end of year, to sell some “losses” up to $3,000. You can always buy back the stocks after 30 days (to avoid the wash rule discussed below), and thereby reduce your overall cost basis.
- Capital gains and losses are classified as long-term or short-term, depending on how long you hold the investment before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. Short-term capital gains are taxed at ordinary income tax rates up to 35%. Long-term capital gains (assets held for more than one year) are taxed at 5% for taxpayers in the 10% and 15% tax brackets (zero percent starting in 2008) and 15% for taxpayers in the 25%, 28%, 33%, and 35% tax brackets. These rates were extended to 2013.
- Dividends paid out of the earnings and profits of a corporation – are generally ordinary income to you. This means they are not capital gains, and so do not qualify for the lower tax capital gain rates.
- Capital gain distributions (also called capital gain dividends) paid to you by mutual funds (or other regulated investment companies) and real estate investment trusts (REITs) are also subject to the above tax rules. Report capital gain distributions as long-term capital gain regardless of how long you have held the investment.
- Beware the Wash Sale rule. You (or your spouse) cannot deduct losses from sales or trades of stock or securities in a wash sale. A wash sale occurs when you sell or trade stocks or securities at a loss and within 30 days before or after the sale you:
- Buy substantially identical stock or securities
- Acquire substantially identical stocks and securities
- Acquire a contract or option to buy substantially identical stock or securities.
- Gain or loss from the sale or trade of an option to buy or sell a capital asset are treated as capital gain or loss.
- Capital loss carryover. If you have a total net loss that is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you had incurred it in the subsequent year. If part of the loss is still unused, you can carry it over to later years until it is completely exhausted. When you carry over a loss, it remains long term or short term (use this first). A long-term capital loss you carry over to the next tax year will reduce that year’s long-term capital gains before it reduces that year’s short-term capital gains
Sources: IRS.gov, IRS publication 550, IRS tax facts