A capital gain occurs when you sell something for more than you spent to acquire it. This happens a lot with investments, but it also applies to personal property, such as a car. Every taxpayer should understand these basic facts about capital gains taxes.
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Anyone who sells a capital asset should know that capital gains tax may apply. And as the Internal Revenue Service points out, just about everything you own qualifies as a capital asset. That's true if you bought it as an investment, like stocks or property. It's also true if you bought it for personal use, like a car or a big-screen TV.
If you sell something for more than you paid for it, the extra money is called a capital gain. You need to report your capital gains on your taxes.
Your cost basis is usually what you paid for the item. It includes not only the price of the item, but any other costs you had to pay to acquire it, including:
Also, money spent on improvements raises the asset's value. For example, a new building addition can be added to your cost basis. Depreciation of an asset can reduce your cost basis.
Many people's biggest asset is their home. Depending on the real estate market, a homeowner might make a huge gain on a sale. The good news is that the tax code lets you exclude some or all of such a gain from capital gains tax. You can do this if you meet all three conditions:
You can exclude up to $250,000 of your gain. You can do this if you meet these conditions and file as Single, Head of Household, or Married Filing Separately. If you file Married Filing Jointly, you can exclude up to $500,000.
If capital losses exceed capital gains, you may be able to use the loss to offset up to $3,000 of other income for the tax year and carry the excess over to future years.
If you sell an asset after owning it for more than a year, any gain you have is typically a "long-term" capital gain. If you sell an asset you've owned for a year or less, though, it's typically a "short-term" capital gain. How your gain is taxed depends on how long you owned the asset before selling.
As anyone with much investment experience can tell you, things don't always go up in value. They go down, too. If you sell an investment asset for less than its cost basis, you have a capital loss. Typically you can use capital losses from investments to offset capital gains. But, you can't use them to offset gains from selling personal property. For example
If capital losses exceed capital gains, you may be able to use the loss to offset up to $3,000 of other income. If you have more than $3,000 in capital losses, this excess amount can be carried forward to future years to similarly offset capital gains or other income in those years.
If you run a business that buys and sells items, your gains from such sales will be business income. They will be taxed as business income, not capital gains.
Many people scour antique stores and garage sales for hidden gems to resell in online auctions. Do this in a businesslike manner and with the intention of making a profit, and the IRS will view it as a business.
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Let a local tax expert matched to your unique situation get your taxes done 100% right with TurboTax Live Full Service. Your expert will uncover industry-specific deductions for more tax breaks and file your taxes for you. Backed by our Full Service Guarantee.
You can also file taxes on your own with TurboTax Premium. We’ll search over 500 deductions and credits so you don’t miss a thing.
