Most taxpayers have heard of capital gains and losses. However, average taxpayers often do not fully understand how the concept of gains and losses applies to virtually all of their investment tools. Generally everything a taxpayer owns and uses for personal or investment purposes is considered a capital asset. The difference between the asset’s basis, which is typically the price the taxpayer initially paid for it, and the amount for which the asset is sold is referred to as either a capital gain or a capital loss, depending on whether the asset sells for more or less than its basis. While losses on the sale of investment property may be deducted, losses on the sale of personal-use property are not deductible. Assets that are held for less than year before it is disposed of, the resulting gain or loss is classified as short-term. A long-term gain or loss occurs when a capital asset is held for a year or longer.
Types of Property that are Not Capital Assets
In Section 1221(a), the IRS simply describes capital assets as property that is owned by a taxpayer. However, the section also lists property types that are exceptions:
- Stock in trade, inventory, or other property that is primarily held for sale to customers in the ordinary course of the taxpayer’s trade or business
- Accounts or notes receivable acquired in the ordinary course of the taxpayer’s trade or business from the sale of property or for services rendered
- Amortizable intangibles and depreciable property used in trade or business
- Real property used in trade or business
- Certain copyrights on literary, musical, or artistic compositions and letters or similar property
- U.S. government publications received by the taxpayer free of charge or for less than the price sold to the public
- Commodities derivative financial instruments held by commodities dealers, subject to certain exceptions
- Hedging transactions clearly identified as such before the close of the day on which the transaction was acquired, originated, or entered into
- Supplies the taxpayer consumes or uses in the regular course of his or her trade or business
Reporting Requirements
Capital gains and deductible losses should be reported on Schedule D of Form 1040. The applicable tax rate for a net capital gain will depend on the taxpayer’s income. For most taxpayers, a zero or fifteen percent rate will apply. However, highest long-term capital gains rate increased from 15 percent to 20 percent in 2013.
To learn more about the reporting requirements for gains and deductible losses, contact Gary M. Kaplan, CPA. Gary is licensed to advise and provide solutions to taxpayers in Florida, Maryland, Washington, D.C., New York, and Utah. Visit gkaplancpa.com or contact Gary Kaplan’s firm at 1 (866) 643-3560.
