What are Capital Gains?
Capital gains refer to the profit realized from the sale of a capital asset, such as stocks, real estate, or investments, when the selling price exceeds the original purchase price (basis). These gains are categorized as either short-term or long-term based on how long the asset was held before sale.
Types of Capital Gains
- Short-term capital gains: Gains from assets held for one year or less. These are typically taxed at ordinary income tax rates.
- Long-term capital gains: Gains from assets held for more than one year. These are generally taxed at lower rates, depending on the taxpayer’s income level.
Reporting Capital Gains
Taxpayers must report capital gains and losses on Schedule D (Form 1040), which is attached to Form 1040. The form includes details such as the date of acquisition and sale, cost basis, and the resulting gain or loss.
- Use Form 8949 to report specific transactions, including sales of assets, capital gain distributions not reported directly on Form 1040, and carryovers from prior years.
- For gains from partnerships, estates, or trusts, report on Form 8949 using information from Schedule K-1 (Form 1065 or Form 1041).
- Undistributed long-term capital gains from regulated investment companies (RICs) or real estate investment trusts (REITs) are reported using Form 2439.
Important Considerations
- Maintain detailed records of the basis of all capital assets to accurately calculate gains or losses. This is required under IRS guidelines (Topic 409 - Capital gains and losses).
- Capital losses can offset capital gains and up to $3,000 of ordinary income annually (not specified in context but standard IRS rule).
- Special rules apply for certain types of assets, such as collectibles (28% rate) or unrecaptured Section 1250 gain, which may require additional forms like Form 6252.
Additional Resources
For comprehensive guidance on investment income and expenses, including capital gains and losses, refer to Publication 550. This publication provides detailed instructions and examples for reporting various types of investment income.
Source:
Form 8949
Schedule D (Form 1040)
Form 2439
Publication 550
Form 6252
Disclaimer: Always verify information with official Federal or State Department of Revenue Forms and Instructions.