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Tax Tip 2004-34, Feb. 19, 2004
Almost everything you own and use for personal
purposes, pleasure or investment is a capital asset. When
you sell a capital asset, such as stocks, the difference
between the amount you sell it for and your basis, which
is usually what you paid for it, is a capital gain or a
capital loss. While you must report all capital gains, you
may deduct only your capital losses on investment
property, not personal property.
A “paper loss” – a drop in an investment’s
value below its purchase price – does not qualify for
the deduction. The loss must be realized through the
capital asset’s sale or exchange.
Capital gains and losses are classified as long-term or
short-term, depending on how long you hold the property
before you sell it. If you hold it more than one year,
your capital gain or loss is long-term. If you hold it one
year or less, your capital gain or loss is short-term. For
more information on the tax rates, refer to IRS
Publication 544, Sales and Other Dispositions of Assets.
If your capital losses exceed your capital gains, the
excess is subtracted from other income on your tax return,
up to an annual limit of $3,000 ($1,500 if you are married
filing separately).
Capital gains and losses are reported on Schedule D,
Capital Gains and Losses, and then transferred to line 13
of Form 1040. This year, the capital loss carryover
worksheet has been removed from the Instructions for
Schedule D to simplify tax preparation. However, there
will be a worksheet in the 2004 Instructions to Schedule D
to figure a capital loss carryover to 2004.
If you have a taxable capital gain, you may be required
to make estimated tax payments. See Publication 505, Tax
Withholding and Estimated Tax, for information on
estimated tax.
The top tax rate on net capital gain (i.e., net
long-term capital gain reduced by any net short-term
capital loss) has been reduced from 20% to 15% (and from
10% to 5% for gains that would otherwise be taxed at a
regular rate of 10% or 15%) for property sold or otherwise
disposed of after May 5, 2003 (and installment sale
payments received after that date). The reduced rate
applies for both the regular tax and the alternative
minimum tax. The higher rates that apply to unrecaptured
section 1250 gain, collectibles gain, and section 1202
gain have not changed.
Dividends paid by most domestic and foreign
corporations after December 31, 2002, are eligible for the
new maximum capital gains tax rate of 15% (5% in some
cases). Qualified dividends are reported on line 9b
of Forms 1040 or 1040A.
Additional information on capital gains and losses is
available in Publications 550, Investment Income and
Expenses, and 17, Your Federal Income Tax. You may
download the publications from this Web site or
order your free copies by calling 1-800-TAX-FORM
(1-800-829-3676).
Taxpayers who have experienced investment
or other types of financial losses should also check out
these other IRS publications:
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564, Mutual FundDistributions
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547, Casualties, Disasters, and Thefts
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527, Residential Rental Property (Including Rental
of Vacation Homes)
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536, Net Operating Losses (NOLs) for Individuals,
Estates and Trusts
Related Items:
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Form
1040, U.S. Individual Income Tax Return (PDF
136K)
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Publication
527, Residential Rental Property (Including
Rental of Vacation Homes) (PDF 187K)
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Publication
536, Net Operating Losses (NOLs) for
Individuals, Estates and Trusts (PDF 213K)
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