Capital Gains and Losses When Selling Stocks, Options or Crypto – Facts and Figures To Minimize Your IRS Tax Liability

Here are some useful facts & figures to be aware of when it comes to capital gains and losses that result for a stock sale. Given the recent volatility and growth in trading understanding how your stock sales will impact your taxes will be critical to keep the gains you made or use your losses to offset your regular taxable income.

Almost everything you own and use for personal or investment purposes is a capital asset. Examples are your home, investment properties, stocks, cryptocurrency, options or bonds held in your personal account. When you sell a capital asset, the difference between the amount you sell it for and your (cost) basis, which is usually what you paid for it, is a capital gain or a capital loss. Capital gains are offset again capital losses, so your net capital gain/loss is the key figure to use in your tax planning.

While most tax software packages (e.g. TurboTax) can figure out your capital gain taxes (CGT) or losses, it is important to be aware of the following items when thinking about taxes and your investments.

  • If your capital losses are more than your capital gains, you can claim a capital loss deduction. Your allowable deduction is $3,000 ($1,500 if you are married and filing separately). You can use your total net loss to reduce your ordinary taxable income up to the $3,000 limit. So make sure at the end of year, to sell some “losses” up to $3,000. You can always buy back the stocks after 30 days (to avoid the wash rule discussed below), and thereby reduce your overall cost basis.
  • Capital gains and losses are classified as long-term or short-term, depending on how long you hold the investment before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. Short-term capital gains are treated like income earned in the current tax year and taxed at ordinary income tax rates. Long-term capital gains (assets held for more than one year) on the other hand are taxed at a maximum of 20%. However, for most taxpayers a zero or 15% rate will apply based on their income levels. A 25 or 28 percent tax rate can also apply to certain types of net capital gain.
  • Dividends paid out of the earnings and profits of a corporation – are generally ordinary income to you. This means they are not capital gains, and so do not qualify for the lower tax capital gain rates.
  • Capital gain distributions (also called capital gain dividends) paid to you by mutual funds (or other regulated investment companies) and real estate investment trusts (REITs) are also subject to the above tax rules. Report capital gain distributions as long-term capital gain regardless of how long you have held the investment.
  • Beware the Wash Sale rule. You (or your spouse) cannot deduct losses from sales or trades of stock or securities in a wash sale. A wash sale occurs when you sell or trade stocks or securities at a loss and within 30 days before or after the sale you:
    – Buy substantially identical stock or securities
    – Acquire substantially identical stocks and securities
    – Acquire a contract or option to buy substantially identical stock or securities.
  • Gain or loss from the sale or trade of an option to buy or sell a capital asset are treated as capital gain or loss and subject to the short or long term tax rates that the underlying securities face.
  • Capital loss carryover. If you have a total net loss that is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you had incurred it in the subsequent year. If part of the loss is still unused, you can carry it over to later years until it is completely exhausted. When you carry over a loss, it remains long term or short term (use this first). A long-term capital loss you carry over to the next tax year will reduce that year’s long-term capital gains before it reduces that year’s short-term capital gains

You can get more details and worksheets on the above items at the IRS website.

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2 thoughts on “Capital Gains and Losses When Selling Stocks, Options or Crypto – Facts and Figures To Minimize Your IRS Tax Liability”

  1. How we’ll be reporting capital gains and losses will be changing for 2011 as a result of new forms being developed by the IRS. Currently, all capital gains or losses are detailed on Schedule D (with additional transactions reported on Schedule D-1 if more room is needed to report all the transactions). Starting with 2011, however, the transaction details will be reported on the new Form 8949, Sales and Other Dispositions of Capital Assets, with various totals carried to Schedule D. The IRS is also revising Form 1099-B, the tax document that brokers issue to investors when a security is sold. Over time, brokers will be required to track and report to investors the cost basis of investments that were sold.

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  2. Reader Question: Can I deduct my capital losses against any type of Capital Gain? Or are short term losses only offset against short term gains?

    From Turbo tax : Losses on your investments are first used to offset capital gains of the same type. So short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain. So, for example, if you have $2,000 of short-term loss and only $1,000 of short-term gain, the net $1,000 short-term loss can be deducted against your net long-term gain (assuming you have one). If you have an overall net capital loss for the year, you can deduct up to $3,000 of that loss against other kinds of income, including your salary and interest income, for example. Any excess net capital loss can be carried over to subsequent years to be deducted against capital gains and against up to $3,000 of other kinds of income. If you use married filing separate filing status, however, the annual net capital loss deduction limit is only $1,500.

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