Calculating Net Capital Gains

Okay, so you understand the basic principle:

sales price - cost of selling - adjusted tax basis = taxable gain (or loss).

But what happens if you sell more than one capital asset during the year? What if you take a loss on one sale, but a gain on another? How do you determine the amount of your gains, and will they be short-term, or long-term gains eligible for the special tax rates?

The general principle is that you must net your short-term gains against your short-term losses, to get a total short-term gain or loss. Then, you net your long-term gains against your long-term losses, to get a total long-term gain or loss. Finally, you net your total short-term gain or loss against your total long-term gain or loss.

If the ultimate result is a long-term gain, it will be subject to the maximum capital gains tax rate of 15 percent (through the end of 2010 after a two-year extension of the rate by the Tax Increase Prevention and Reconciliation Act of 2005). If the result is a short-term gain, it will be subject to tax at your regular income tax rate.

If the result is a loss, whether short-term or long-term, up to $3,000 of it (or up to $1,500 for married people filing separately) will be deductible from your ordinary net income. If your losses exceed this amount, you can carry them over and deduct them in subsequent years until they are used up.

• For depreciable property that is used for both business and personal purposes, both the basis and sale proceeds of the property must be allocated between the two types of usage.
• Our case study shows how the allocation would apply if you sold your home after using the home office deduction for more than three years out of the last five.
• If you sell your sole proprietorship business, each of the assets sold with the business is treated separately. (If you sell another type of business, you'll almost certainly need expert advice in sorting out the tax consequences, so we don't discuss the ramifications of that kind of sale here.)