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Capital Gains and Losses

Capital gains or losses occur when a capital asset is sold.

Almost everything you own and use for personal or investment purposes is a capital asset. Examples are your home, household furnishings, and stocks or bonds held in your personal account.

When you sell a capital asset, the difference between the amount you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss.

You have a capital gain if you sell the asset for more than your basis. You have a capital loss if you sell the asset for less than your basis. Losses from the sale of personal-use property, such as your home or car, are not deductible.

Capital gains and losses are classified as long-term or short-term. If you hold the asset for more than 1 year before you dispose of it, your capital gain or loss is long-term. If you hold it 1 year or less, your capital gain or loss is short-term.

If you have a net capital gain, that gain may be taxed at a lower tax rate. The term "net capital gain" means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss.

The highest tax rate on a net capital gain is generally 15% (or 0%, if it would otherwise be taxed at 15% or less). The 0% rate applies for 2008-2010 only. There are 3 exceptions:

1. The taxable part of a gain from qualified small business stock is taxed at a maximum 28% rate, but you may be eligible to exclude up to 50% of the gain.
2. Net capital gain from selling collectibles (such as coins or art) is taxed at a maximum 28% rate.
3. The part of any net capital gain from selling Section 1250 real property (for example, rental real estate) attributable to straight-line depreciation is taxed at a maximum 25% rate.

If your capital losses exceed your capital gains, the amount of the excess loss that can be deducted from your other income is limited to $3,000, or $1,500 if you are married filing separately. If your net capital loss is more than this limit, you can carry the loss forward to later years.

Related IRS Publications: 544, 550, 551.