When you sell a capital asset, the difference between its cost basis and the selling price results in a capital gain or loss.
- A capital gain is when your asset's sales price exceeds its cost basis (in other words, you made money). Capital gains must be reported on your tax return.
- A capital loss is when you sell the asset for less than its cost basis. Capital losses from investments can be deducted, but not those from personal-use assets, such as your home or personal vehicle.
Your total capital gains for the year minus your total capital losses results in either a net capital gain or a net capital loss.
- Short term capital gains (gains on assets held one year or less) are taxed as ordinary income.
- Long term capital gains (gains on assets held more than one year) are taxed at a more favorable rate than ordinary income.
- Net losses are deductible, but only up to a maximum of $3,000 ($1,500 if married filing separately). Any capital losses you couldn't deduct this year can be carried forward and deducted on future tax returns. This is called a capital loss carryover.
