Many people do not truly understand the wide-ranging scope of capital gains and losses in relation to investments. While most of us understand that investments in the stock market or bonds are considered eligible for capital gains/loss implications for our taxes, there are a host of other items that can also trigger capital gains and losses that should be reported on your tax return. This article will look at capital gains and losses to help you determine the best course of action for claiming them.
All Major Purchases
Did you know that almost all personal purchases are considered capital assets and are subject to capital losses/gains upon sale of the item? The most obvious assets include your home and stock investments – yet even major household furnishings (such as a big screen TV, art, jewelry, and furniture) are considered capital assets. If you sell these items, you are liable to incur a capital gain or a capital loss.
A capital gain is when you sell an item for more than the basis that you have invested in that item. On the other hand, a capital loss is when you sell an item for less than what your basis is for that item.
Long or Short Taxes
Capital losses/gains are also calculated based on whether the item is considered a short-term or long-term item. If you hold an investment for more than a year, it is considered a long-term capital asset. Long-term capital assets are subject to a lower tax rate than short-term capital assets, but both types are calculated based on your annual income and the current capital gains tax rate.
The capital gains tax rate ranges from 0% to 28%, depending on your tax bracket and the specific capital asset that you have sold. Short-term gains taxes can be anywhere from 10–20% higher than long-term capital gains taxes. Also, capital gains taxes can trigger additional tax implications for assets sold in the first year due to depreciation write downs.
If you purchase an electronic appliance or new vehicle and you sell it within the first year, you will assuredly have a large short-term capital gain because of the high amount of depreciation on those categories of items compared to their resale’s price within the same period.
Offset Your Gains
The largest benefit to having capital assets is the ability to offset any gains (made from sales during year) with any losses that occurred within the same year. If you have $10,000 in gains but $15,000 in losses for the same year, the additional $5,000 in losses can actually be applied to reduce your tax liability by as much as $3,000 (or $1,500 for couples filing separately).
Another benefit of capital losses is that they can be carried forward to future tax years to offset your future gains. To ensure that you get the most benefits from your capital gains and losses, consider speaking with a tax consultant who can diagnose your situation.