It does not matter if you are a tax preparer or a tax payer, either way you need to understand what Capital gains and losses are for tax reporting. A lack of understanding can create huge problems with the IRS in subsequent years. So let’s try to understand what they are and the different types.
What are we taxing?
Capital gains and losses are taxes on assets owned, such as stocks, bonds, mutual funds, real estate (excluding primary residence) and collectibles. These are the main ones. It is the owning and selling of these assets outside of a qualified account that create the capital gains and losses for tax purposes. If these same assets are held inside of a qualified account, they are not taxed when bought and sold, but rather when it is distributed out of the qualified account. This is known as a tax-deferred account.
Short Term Capital Gains and Losses
By IRS definition, a short term capital gain (or loss) is any asset owned for less than one year. The ownership time starts the day after it is purchased and exactly one year or less that it was sold. Technically, it is considered as income and taxed at the taxpayer’s income tax rate. This is typically an unfavorable tax, as it can put tax payer into a higher tax bracket on the gains.
Long Term Capital Gains and Losses
By IRS definition, a long term capital gain (or Loss) is any asset owned for more than one year. It would be one day after the short term expiration date. Another way to say it would be 12 months and one day of ownership, going into the 13th month. These are taxed more favorably at 0%, 15% or 20% depending on one’s tax bracket. This is typically a more favorable tax than short term capital gain or loss.
Deducting losses will have their limits. The rules and how they are applied in this case are much more complex than can be explained here. Understand that there is technically only one IRS code (however complex) that applies across the board to all Americans. It is important to know and grasp this meaning. That is why you should strongly consider looking at our Tax Preparation Classes. This will greatly improve your understanding of the tax code and assist you as you serve your clients.