Capital finances may be either positive or negative, depending on whether you earn or lose money during the course of a year. A capital gain occurs when you have a positive change in your non-employment income, while a negative change to your finances due to non-employment assets is instead called a capital loss.
As the IRS explains it, “almost everything owned or used for personal or investment purposes is a capital asset.” This includes every material possession that you own, including your home and vehicle, as well as any purchase that you make for the main purpose of turning a profit, such as an investment property or stock shares. These capital assets figure into your taxes in many ways. Any building that you own, for instance, is generally subject to property taxes.
How to Figure Capital Gain or Loss
When you figure up your capital gain for a tax year, you must list and figure the totals in separate categories for tax purposes. Stock sales and losses, for instance, are figured together to come up with a positive or negative number. For example, if you sold stock shares at a profit of $200 early in the tax year and sold shares for a loss of $300 late in the tax year, you combine the profit and loss for a total loss of $100. This is considered a capital loss. If the figure were positive, it would be a capital gain.
How To Declare Capital Gain or Loss
Any investment that you sell for a profit or at a loss during the tax year, whether that investment is in stock form or in physical form, such as antiques, must be declared on your income tax return. To declare a capital gain or loss on your tax return, complete Form 1040, Schedule D. On this form, list all of the stocks or items that you sold and the profit or loss on each item, and then figure these numbers to get your total gain or loss for taxation purposes.
The reason that you must declare capital gains and losses in separate categories on your yearly income tax form is because capital gains are taxed at different tax rates, depending on the type of investment property. Gains earned on stocks, for instance, carry a maximum tax rate of 15 percent, while gains earned on artwork may be taxed up to a rate of 28 percent. Like the taxes on your working income, these rates depend mostly on your adjusted gross income for the year.
- Jupiterimages/Comstock/Getty Images