Understanding Capital Assets and How Capital Gains and Losses May Affect Your Taxes

Capital gains and losses can have a bigger impact on your tax bill than you might expect. In this article, Staff Accountant Kayla Guarisco breaks down what qualifies as a capital asset, how gains and losses are classified and illustrates why understanding the impact is a key part of smart, proactive tax planning before you buy, sell or invest.

What are capital assets?

Capital assets are almost everything you own and use for personal or investment uses that provide value to the owner over its life. It does not have to be connected to any type of business or profession to be considered a capital asset. Examples of capital assets include, but are not limited to:

• Properties like office buildings, warehouses, or your home*
• Vehicles
• Household furnishings
• Stocks and bonds held as investments

* Losses from the sale of personal use property are not tax deductible.

Classifications of Capital Gains/Losses

Generally, when you sell a capital asset, the difference between the adjusted basis, which is essentially the cost of the asset, and the amount you realized from the sale is your capital gain or loss. If you sell the asset for more than what it cost you, then you have a capital gain. If you sell the asset for less than what it cost you, then you have a capital loss.

Capital gains and losses are split into two separate categories: long-term and short-term, which is determined by how long you held the asset for. The general rule is to count from the day after the day you acquired the asset up to and including the day you sold the asset. If you hold the asset for more than one year before you sell it, the capital gain/loss is considered long-term. If you hold it for one year or less, your capital gain/loss is short-term.

One thing to note is if you received the asset as a gift or inheritance the holding period differs compared to other capital assets. For gifts, which is the transfer of an asset without expecting anything in return, the holding period that the donor classified the capital asset as carries over to the recipient. Therefore, if the donor gifts a capital asset held long-term, the recipient will also classify it as long-term. An inheritance are assets received from a decedent’s estate, often received through a will. For capital assets received through an inheritance, the holding period is always long-term.

Once these things are determined, the gains and losses for each classification are netted together. The term “net short-term capital loss” means you had an excess of short-term capital losses over short-term capital gains. The term “net long-term capital gains” means you had an excess of long-term capital gains over long-term capital losses, which includes any unused long-term capital loss carried over from previous years**.

** For personal tax purposes, when your capital losses exceed your capital gains, you can claim to lower your income the lesser of $3,000 ($1,500 if filing separately) or your total net loss shown on line 16 of your Schedule D, Capital Gains and Losses. If your net capital losses exceed this limit, you can carry over this loss to later years.

Capital Gains Tax Rates

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. A lower tax rate may apply to the gain than the tax rate that applies to your ordinary income.

Net capital gains are taxed at different rates depending on your overall taxable income. Starting in taxable years beginning in 2025, the tax rates are as follows:

A rate of 0% applies if your taxable income is less than or equal to:

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

A rate of 20% applies if your taxable income exceeds the 15% thresholds.

Some other exceptions to these rates that may cause your capital gains to be taxed greater than 20% include:

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

Where to Report

You should report most sales and other capital transactions and calculate your capital gain or loss on your Form 8949, Sales and Other Dispositions of Capital Assets. Your capital gains and deductible capital losses should them be summarized on your Schedule D (Form 1040). These forms can be found on the IRS website.

Conclusion

It is important to know how much you make off the selling of your capital assets for tax planning. If you have taxable capital gains, you may be required to make estimated tax payments throughout the year. You may also be subject to other tax rules depending on the amount. If you have questions about the contents above, contact us.

Sources

• https://www.irs.gov/taxtopics/tc409
• https://www.wallstreetmojo.com/capital-assets/
• Capital Gains Tax: Rates for 2025, How to Calculate and More
• Basis of Assets Received by Gift or Inheritance | Chapter 12: Basis of Assets | PART IV: Federal Taxation of Property Transactions (Area III) | Taxation and Regulation (REG) | US CPA Exams Mastery
• Understanding the Holding Period Inherited Property: Tax Implications and Capital Gains