Capital gains are a profit made from the sale of any capital asset that has a sales price exceeding the cost basis, or the original price of an investment. For example, selling an asset with a cost basis of $5,000 for $10,000 means that you got a capital gain of $5,000. A capital loss, however, if the reverse happens and you sold an asset for less than its cost basis.
How much tax you’ll need to pay for your capital gains will be based on the length of time you held the investment. Assets sold within a year after purchase may have a higher tax rate than those held longer than a year.
Capital assets. These include investments like stocks, mutual funds, bonds, real estate, precious metals, and collectibles like coins and art. You will be taxed for the change in value when these investments are sold.
Capital losses. This refers to the loss incurred when a capital asset decreases in value. It is realized when the asset is sold for a price lower than the cost basis. Net losses over $3,000 can be carried over to the following year to offset gains or reduce taxable income.
Long-Term Capital Gains
After the passing of the Tax Cuts and Jobs Act (TCJA), the 0% capital gains tax rate applies to incomes of up to $40,000 if single, $53,600 if qualified as head of the household, or $80,000 if married and filing a joint return. The 15% bracket applies to incomes of up to $441,450 if single, $469,050 if qualified as the head of the household, or $496,600 if married and filing jointly.
The 20% rate applies to income levels exceeding the above levels.
Broker Reporting Requirements
The Emergency Economic Stabilization Act of 2008 required financial services companies to maintain and report cost basis information for mutual fund purchases and subsequent redemptions to the IRS. The goal of having brokers report cost basis along with sales proceeds was to reduce the burden on individual taxpayers in maintaining extensive records on their investments, simplifying the tax process.
Prior to the EESA, Form 1099-B only contained information about the sale of investments like the date of sale and sale proceeds. Taxpayers would have to provide the purchase date and the purchase price upon reporting the transactions on their tax returns.
Form 8949 vs. Schedule D
Capital losses and capital gains are reported using Form 8949. Form 8949 is the form used by individuals, businesses, and estates, and trusts to report capital gains. It is used whether one is reporting short- or long-term capital gains.
Schedule D of Form 1040 is used to report most capital gain or loss transactions. This is more often used to sum up the capital gains you report on Form 8949, which means that you need to complete Form 8949 before you can enter your net gain or loss on Schedule D.
Additionally, the IRS introduced a new tax form in 2018, which replaced the old 1040 and Forms 1040A and 1040Ez. These new tax forms add to all the old forms and schedules, including Schedule D and Form 8949.
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