Capital Gains

Any asset you own for investment purposes is considered a capital asset.  This can include, stocks, bonds, real estate, or even a baseball card.  When you acquire this asset, the cost is considered to be the basis and the difference between the sales price and the basis is known as a capital gain or capital loss.  Capital gains and losses are recorded on your 1040, schedule D and are taxed differently based on whether they are short-term or long-term capital gains.

Long-Term Versus Short-Term Capital Gains

Profits are considered to be long term if there is over 1 year beteween the purchase and sale of that asset.  If the asset is held for less than a year, it is designated as short term for tax reporting purposes.  Long term capital gains are taxed at a maximum of 15% with the exception of gains from small business stock and collectibles which are taxed at a maximum of 28%.  Now there is another exception; for the years of 2008, 2009, and 2010 long term capital gains will not be taxed for those who are in the 10% to 15% tax bracket.  Short term capital gains are taxed at your ordinary income tax rate which can be up to 35%.

Capital Loss Deductions

The IRS allows for a deduction of $3,000 per year on capital losses.  Capital losses in excess of this amount will be carried forward to the next year, in which another $3,000 can be deducted again.  Short term capital gains may offset short term capital losses while longer term capital gains can offset long term capital losses.