| What is a capital asset? Tax authorities like the | | | | the tax year. If gains are less than your losses, |
| Internal Revenue Service and state taxing | | | | you have a cumulative or net loss. This means |
| authorities expect you to report any capital gains | | | | you can deduct up to $3000 ($1,500 if you are |
| or losses on your annual income tax return. This | | | | married but filing separately) from your income |
| information is reported on IRS Form 1040, | | | | tax. If the loss is greater than this annual limit, |
| Schedule D, Capital Gains and Losses and then | | | | you can "carry forward" the unused loss into |
| transferred as a "cumulative" net amount to Line | | | | future years until it is all used up. There is a catch, |
| 13 in the income section on the top page of your | | | | though. You can deduct a capital loss only on |
| IRS Form 1040. You can't file an income tax | | | | investment property; you can't deduct a capital |
| return that has capital gains or losses using IRS | | | | loss on personal use property. This distinction is |
| Form 1040A if you are required to file Schedule D | | | | important; you typically don't own investment |
| to report the income. | | | | property, according to IRS code, for personal |
| Why should you care what is or is not a capital | | | | enjoyment! It is also important to remember that |
| asset? It is important because it could save you | | | | if you anticipate a significantly large taxable capital |
| money! Tax rates applied to capital gains income | | | | gain during the year, you are required to make |
| are often significantly lower than a person's | | | | estimate tax payments (even though it will be |
| marginal income tax rates. In other words, you | | | | taxed at a preferentially lower rate). |
| often owe less tax if you sell a capital asset! For | | | | Your understanding of the definition of a capital |
| 2009 and 2010, a taxpayer in the 15% marginal | | | | asset and how you dispose of it is an important |
| income tax bracket will pay 0% on any net capital | | | | part of managing your personal finances. More |
| gains! But there is yet another way it can save | | | | information is available in IRS Publication 544, Sales |
| you money. | | | | and Other Dispositions of Assets or on the IRS |
| The second way you can save money is if your | | | | website, IRS.gov. Knowing the "rules" about capital |
| capital loss is greater than your capital gains for | | | | assets could save you lots of cash AND grief. |