Capital Gains and Losses

• The tax code defines a capital gain as the profit from the sale of any asset. Assets can include property, cars and investments. The amount of a capital gain is the price received for the sold asset less the amount paid to buy the asset. For investment assets such as stock shares, any loss from the sale of the investment is also reported on your tax return. Capital gains and losses are calculated separately, and the taxes due are determined from the net results.
  
  

Types of Gains and Losses

• Capital gains and losses are divided into two categories for tax purposes -- long term and short term. Long-term capital gains or losses are from stocks owned for more than one year before the stock was sold. Short-term capital gains or losses are from stock that was owned for less than a year. Each category, short-term gains, short-term losses, long-term gains and long-term losses must be calculated and totaled separately.
  
  

Capital Gains Tax Rates

• Short-term capital gains are taxed at your regular marginal tax rate. Long-term capital gains qualify for a lower tax rate. Under the Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010, the existing long-term capital gains tax rates were extended through the end of 2012. For taxpayers with marginal tax rates below 25 percent the tax rate on long-term capital gains is zero percent. Tax payers in a 25 percent or above tax bracket will pay 10 percent long term capital gains tax.
  
  

Offsetting Gains With Losses

• Capital losses from the sale of stock can be used to offset capital gains and reduce the taxes due. Short-term losses are first used to offset short-term gains, and long-term losses offset long-term gains. Any remaining losses can be used to offset the other type of capital gain. If total capital losses exceed capital gains for the year, up to $3,000 in excess losses can be used to offset other income and any left over losses carried forward to future tax years.