Understanding capital gains and losses

Taxes associated with capital gains and losses

When you sell capital assets like stocks and bonds, there is a tax implication. But knowing what tax rate applies depends on various factors. We’ll navigate the ins and outs of capital gains and losses, but for any questions on your specific situation, always reach out to a local Jackson Hewitt Tax Pro.

What are capital gains and losses?

When you sell a capital asset, the difference between what you bought it for and what you sold it for is the amount of capital gain, if you made money, or a capital loss, if you lost money.

Broadly speaking, you have a capital gain if you sell the asset for more than you paid for it. You have a capital loss if you sell the asset for less than you paid for it.

What if you have a capital loss?

If your losses exceed your gains, you have what’s called a capital loss. You can deduct some or all of it from your taxes. Depending how great your losses are, you may need to carry your deductions over to later years. Here’s how that works.

Capital losses that exceed capital gains in a year may be used to offset ordinary taxable income up to $3,000 in any one tax year. Net capital losses in excess of $3,000 can be carried forward indefinitely until the amount is used up. If there is still a remaining loss amount when the taxpayer dies, it can be claimed as an itemized deduction on Schedule A.

You may use the Capital Loss Carryover Worksheet to figure the amount you can carry forward. Your Tax Pro can work with you on this, as it can be very complex.

How to calculate capital gains tax in 2023?

The tax rate on most net capital gains is no higher than 15% for most individuals. They may not need to pay capital gains tax if their taxable income is less than or equal to $44,625 for those filing single and married filing separately, $89,250 for those married filing jointly or qualifying surviving spouse or $59,750 for those filing head of household. Below, we explore how rates apply to different income thresholds.

A capital gain rate of 15% applies if your taxable income is:

• More than $44,625, but less than or equal to $492,300, for single;
• More than $89,250, but less than or equal to $553,850, for married filing jointly or qualifying surviving spouse;
• More than $59,750, but less than or equal to $523,050, for head of household, or more than $4,625, but less than or equal to $276,900, for married filing separately.

However, a net capital gain tax rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate that we outlined above.

There are a few other exceptions where capital gains may be taxed at rates greater than 20%:

• The taxable part of a gain from selling section 1202 qualified small-business stock is taxed at a maximum 28%
• Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28%
• The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25%

It’s important to note that net short-term capital gains are subject to taxation as ordinary income, using the same tax rate as the rest of your income.

What are short-term and long-term capital gains?

Before we go into taxation, let’s break down the two types of capital gains: short-term capital gains and long-term capital gains.

• Short-term capital gains: Gains on assets that you've sold after holding them for one year or less.
• Long-term capital gains: Gains on assets that you've sold after holding them for more than one year.

How are short-term capital gains taxed?

To correctly arrive at your net capital gain or loss, capital gains and losses are classified as long-term or short-term. This is where the length of time you hold onto an asset really matters.

To figure out how long you held the asset (in this case, a security), you count from the day after you bought the asset, up to and including the day you sold the asset.

If you have a net capital gain, a lower tax rate may apply to the gain than the tax rate that applies to your ordinary income. 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 for the year.

What is a long-term gain and how is it taxed?

As mentioned above, long-term capital gains are the appreciation of assets that you've sold after holding them for more than one year.

A long-term capital gains tax is a tax on profits from the sale of an asset held for more than a year. The long-term capital gains tax rate is either 0%, 15%, or 20%, depending on your taxable income and filing status. Long-term capital gains tax rates are usually lower than short-term capital gains tax rates.

Can I deduct my capital losses?

Yes, you can deduct your capital losses, but there are limits and thresholds. Losses on your investments are first used to offset capital gains of the same type. Short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains.

Offsetting capital losses

Capital loss carryover rules

As outlined above, if your losses exceed your gains, you have what’s called a capital loss. You can deduct some or all of it from your taxes. Depending how great your losses are, you may need to spread out your deductions over to later years. Here’s how that works.

Capital losses that exceed capital gains in a year may be used to offset ordinary taxable income, up to $3,000 in any one tax year. Taxpayers using the married filing separately status can only use $1,500 of loss to offset income each year. You can carry forward net capital losses of more than $3,000, or $1,500, indefinitely, until you have deducted the entire amount.

You may use the Capital Loss Carryover Worksheet to figure the amount you can carry forward. Your Tax Pro can work with you on this, as it can be very complex.

How to report capital gains and losses on the 2023 tax return?

You’d report most sales and other capital transactions and calculate capital gain or loss on Form 8949, Sales and Other Dispositions of Capital Assets, then summarize your capital gains and deductible capital losses on Schedule D (Form 1040), Capital Gains and Losses.

Questions about capital gains and losses? Your Tax Pro can help you with what to do and what other forms to use, depending on your situation. Find one near you today.

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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