Some of your assets, such as your home and your investments, might appreciate over time. When you sell them, you have a taxable capital gain. How much you have to pay in capital-gains tax depends on such factors as your cost basis and how long you've owned the asset.
The difference between the cost basis of a capital asset and the net sales price that you receive when you sell it is either a capital gain or a capital loss. If you sold the item for more than its basis, you have a capital gain. The IRS requires you to report all capital gains. You can't take a tax loss on personal items, but you can offset your capital gains with investment losses.
Determine the basis of your capital assets. The cost basis for most of your personal possessions is the item's purchase price, but there are factors that can affect the cost basis of certain types of assets. For example, if you make improvements to your home, such as adding on a room, your home's cost basis increases by the cost of the improvements. You can add commissions, transfer fees and recording fees to the price of your stock investments. If you purchased shares of stock at different times and at different prices, you will have a different cost basis for each block of shares.
Long-Term vs. Short-Term
Determine your holding period. Short-term capital gains are taxed as ordinary income, while long-term gains are taxed at the more advantageous long-term capital-gains tax rate, which is typically no more than 15 percent. Short-term capital gains are gains on the sale of an asset you owned for one year or less. Long-term capital gains are gains on the sale of an asset you owned for more than one year.
Figure your short-term capital gains or losses on Line 1, Part I of IRS Form 8949. You'll need to know the name or description of the asset, the date you acquired it, the date you sold it, how much you sold it for and the asset's basis. Total your sales prices and bases on Line 2. Repeat the process on Lines 3 and 4 of Part II of IRS Form 8949 for your long-term capital gains or losses.
Transfer the information about your short-term gains or losses from Line 2 of Form 8949 to Line 1, 2 or 3 of Schedule D, Capital Gains and Losses. Transfer the information about your long-term gains or losses from Line 4 of Form 8949 to Line 8, 9 or 10 of Schedule D. Figure your capital gains tax using the Schedule D Tax Worksheet located on the last page of IRS's Instructions for Schedule D (and Form 8949) publication. The tax table you use to determine the tax rate for your capital gains is determined in part by your income.
- IRS: Topic 409 - Capital Gains and Losses
- IRS: Like Share Print Stocks (Options, Splits, Traders)
- Tax Policy Center: Capital Gains and Dividends: How Are Capital Gains Taxed?
- IRS: Publication 550, Stocks and Bonds
- IRS: Form 8949
- IRS: Form 1040
- IRS: Instructions for Schedule D
- IRS: Instructions for Form 1040
- IRS: Schedule D
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.