Apps like Robinhood make it easy for everyone to play the stock market. If you’re a retail investor who made money last year buying and selling stocks, you may owe capital gains tax when you file your tax return this year. If you lost money, you may be able to deduct that loss and reduce your income.
Here’s what you need to know about capital gains tax:
Capital Gains and Losses Defined
A capital gain or loss is the difference between your basis – the amount you paid for the asset – and the amount you receive when you sell an asset. All capital gains (or losses) must be reported on your tax return.
Losses Limited to $3,000
If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return to reduce other income, such as wages. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.
Carryover of Losses Allowed
If your total net capital loss is more than the limit you can deduct, you can carry it over to next year’s tax return.
Long and Short Term Gains and Losses
Capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
Net Capital Gain
If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain. Subtract any short-term losses from the net capital gain to calculate the net capital gain you must report.
Capital Gains Tax Rates
The tax rates that apply to net capital gain depend on your income, but are generally lower than the tax rates that apply to other income. The maximum tax rate on a net capital gain is 20 percent. However, for most taxpayers a zero or 15 percent rate will apply. However, If your income is above a certain amount you may be subject to the 3.8 percent Net Investment Income Tax (NIIT) on these capital gains.
Reporting Capital Gains and Losses
Report capital gains or losses using Form 8949, Sales and Other Dispositions of Capital Assets and Schedule D (Form 1040), Capital Gains and Losses to summarize capital gains and losses.
Please call if you need more information about reporting capital gains and losses.
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.