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Whether you are an experienced investor, or simply owned some investment or real estate property that you sold at a profit in 2017, capital gains and losses can be tough to figure out at tax time. However, with a basic knowledge of the laws and procedures involved, and the right tools, it isn't too hard to learn how to prepare your return correctly.
A capital gain is the profit you make from the sale of an investment or an asset. It is a form of taxable income that is different from ordinary income in that it is taxed at different rates.
A capital loss (as the name implies) is the opposite of a gain, and it can be treated as a form of tax deduction at the time of filing. It is, in its most basic form, the amount you lose during the sale of an investment or an asset. (See below for more info).
You need to report capital gain or loss if you sold stock, mutual funds, real estate, or collectibles or if you redeemed any retirement bonds or notes in the past year.
Other, less common sales that require the filing of Schedule D, include:
• loss carryovers
• profits from installment sales
• home sales
• like-in-kind sales
• commodity straddles
• trusts, and
• any revenue made or lost from investments in S Corporations.
• undistributed capital gains.
For each individual sale, of a stock, mutual fund, collectible, you are responsible for calculating its capital gain or loss, entering it on your Schedule D, and then using these figures to determine your net capital gain or loss for the entire year.
Perhaps you lost money on an investment that you sold last year (you cannot claim a loss on an open position). Sorry. It happens to the most careful investors.
The good news is, the IRS offers you some relief by way of a capital loss deduction. Each year, you are allowed to claim up to $1500 (or $3000 if you are married filing jointly) in investment capital losses, which reduces your total taxable income.
Obviously, your losses must first offset any gains that you earned, so if you sold one investment that made you $5000, and another that lost you $4200, you are only able to claim the difference between the two ($800).
However, and this is very important, the IRS gives investors a further break by allowing you to carry over your losses from one year to the next. So if you lost $10,000 on an investment in 2017, but can only claim the maximum $1500 this year, you are allowed to carry the remaining loss until next year's filing period, and claim the maximum allowed then. You can do this in perpetuity, until you have "written off" your entire loss.
A sponsor message on how to make it all easier:
Next: how different capital gains tax rates are assessed.
You can get more information about capital gains tax laws directly from the IRS, in the form of IRS Publication 550.
If you file a paper return, you will also have to fill out Form 8949 and Schedule D or possibly Schedule D-1.