A capital asset generally is something that you own as an investment but can also be something that you hold as a personal item or even an intangible property. Capital assets range from anything from stocks and bonds, real estate, property, artwork, and even intellectual assets. Anything that you sell, exchange, trade, or barter is subject to tax upon the transaction which transfers title of that asset to someone else, or other entity.
Capital assets include property such as your home or car, as well as investment property, such as stocks and bonds.
Gains and Losses
A capital gain or loss is the difference between your cost, or basis, and the amount you exchange an asset.
Your basis is usually what you paid for the asset, but with some assets which are depreciable, adjusted for any depreciation that was taken, or should have been taken against the asset while you owned it.
Net Investment Income Tax
You must include all capital gains in your income and you may be subject to the Net Investment Income Tax (NII).
This tax applies to the net investment income of individuals, estates and trusts that have income above statutory threshold amounts. The NII tax rate is 3.8 percent over and above any other taxes you may have to pay.
You may be able to deduct capital losses on the sale of investment property.
You cannot deduct losses on the sale of property that you hold for personal use.
Long and Short Term Capital Gains
Capital gains and losses are either long-term or short-term, depending on how long you held the property. If you held the property for more than one year, your gain or loss is long-term. If you held it one year or less, the gain or loss is short-term.
Net Capital Gain
Should your long-term gains be more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain.
Depending upon your overall income, the maximum net capital gain tax rate is 20 percent, however, for most taxpayers a zero or 15 percent rate will apply.
A 25 or 28 percent tax rate can also apply to certain types of net capital gains.
Limit on Losses
If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return up to $3,000 per year, or $1,500 if you are married and file a separate return.
If your total net capital loss is more than the limit you can deduct, you will need to carry over the excess losses you are not able to deduct to next year’s tax return. You will treat those losses as if they happened in that next year.