Reporting Capital Gains and Losses to IRS - John R. Dundon II, Enrolled Agent
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Reporting Capital Gains and Losses to IRS

Business Entity Selection and the Tax Consequences of Converting

Reporting Capital Gains and Losses to IRS

In tax year 2011 the IRS created Form 8949, Sales and Other Dispositions of Capital Assets, for taxpayers to calculate capital gains and losses. List all capital gain and loss transactions on this form. The subtotals from this form will then be carried over to Schedule D (Form 1040), where gain or loss will be calculated.

Additional resources about reporting capital gains and losses are the Schedule D instructions, IRS Publication 550 Investment Income and Expenses and IRS Publucation 17 Your Federal Income Tax.

Capital assets include for example your home, household furnishings and stocks and bonds held in a personal account. When you sell a capital asset, the difference between the basis or generally the amount you paid for the asset and its sales price is a capital gain or capital loss.

Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. You must report all capital gains however you may only deduct capital losses on investment property, not on personal-use property.

Capital gains and losses are classified as long-term or short-term. If you hold the property more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term. If you have long-term gains in excess of your long-term losses, the difference is normally a net capital gain. Subtract any short-term losses from the net capital gain to calculate the net capital gain you must report.

The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. If your capital losses exceed your capital gains, you can deduct the excess on your tax return to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.

If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.