A capital gain is the profit a taxpayer makes when they sell or exchange an asset for more than its adjusted basis.
Common capital assets include:
- Stocks and mutual funds
- Real estate
- Cryptocurrency
- Business or investment property
Adjusted basis is generally what the taxpayer paid for the asset, plus improvements and minus depreciation or other adjustments.
🧾 How Capital Gains Are Calculated
Capital Gain Formula:
Capital Gain = Sale Price − Adjusted Basis
- If the result is positive, the taxpayer has a capital gain
- If the result is negative, the taxpayer has a capital loss
📅 Short‑Term vs. Long‑Term Capital Gains
Short‑Term Capital Gain
- Asset held 1 year or less
- Taxed at ordinary income tax rates (same as wages)
Long‑Term Capital Gain
- Asset held more than 1 year
- Taxed at preferential rates:
- 0%
- 15%
- 20%
- The applicable rate depends on the taxpayer’s taxable income and filing status
✅ Holding period begins the day after acquisition and ends on the date of sale.
🛠️ Example:
You bought stock for $5,000 and sold it for $8,000 after 2 years.
- Adjusted Basis = $5,000
- Sale Price = $8,000
- Capital Gain = $3,000
- Since you held it for more than a year, it’s a long-term capital gain.
📄 Reporting Capital Gains and Losses
Capital gains and losses are reported on:
- Form 8949 (details each sale)
- Schedule D (summarizes total gains and losses)
Net Capital Loss Rules
- Up to $3,000 per year of net capital losses can offset ordinary income
- Any unused losses can be carried forward to future tax years
✅ Tax software calculates netting and carryforwards automatically based on entered information.