What is a capital gain or loss?
You have a capital gain if you sold the asset for more than its cost basis (in other words, you made money on the sale). Capital gains must be reported on your tax return.
Similarly, you have a capital loss if you sold the asset for less than its cost basis. You can deduct capital losses from the sale of investment assets but not 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.
- Net gains are taxed at a (usually) more favorable rate than ordinary income. This is often referred to as the "capital gains tax."
- 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.