01
Short-Term Capital Gains
A capital asset held for one year or less is generally treated as a short-term asset when it is disposed of.
ONE YEAR OR LESS
CAPITAL GAINS TAX
Capital Gains Tax: How Investment and Property Profits Are Taxed
Understand how capital gains work when you sell investments, property and other assets, including the role of cost basis, holding period, capital losses and federal tax rules.
01
Short-Term
Generally one year or less
02
Long-Term
Generally more than one year
03
Tax Basis
Important to gain calculations
CAPITAL ASSET
Potential gain
↑
HOLDING PERIOD
SHORT / LONG
ASSET
INVESTMENT
THE BASICS
Capital gains start with the difference between what an asset is worth to you and what you receive when you sell it.
A capital gain generally occurs when you sell a capital asset for more than its adjusted basis. Capital assets can include investments such as stocks and bonds, real estate and other property held for investment or personal purposes.
The calculation is not always as simple as subtracting the original purchase price from the sale price. Your basis may change during the period you own the asset, and certain selling expenses can affect the amount realized.
Understanding the numbers behind a sale can make capital gains tax easier to follow. It also helps explain why keeping purchase records, improvement costs and other supporting documents matters long before an asset is eventually sold.
INVESTMENT TAX
What you earn from an asset can have tax consequences when you sell.
INVESTMENTS
A rising investment value is not necessarily a taxable gain until a taxable transaction occurs.
If an investment becomes more valuable while you continue to hold it, the increase is generally an unrealized gain. The tax calculation usually becomes relevant when you sell or otherwise dispose of the asset in a transaction that is subject to tax.
For stocks and other securities, the amount you paid generally forms the starting point for determining basis. Depending on the investment and transaction history, additional adjustments may need to be considered.
Brokerage statements can be useful when reviewing investment transactions, but taxpayers should still check the reported information against their own records, particularly when securities have been transferred, inherited or acquired through more complicated transactions.
HOLDING PERIOD
How long you own an asset can affect how its gain or loss is classified.
Federal tax rules generally divide capital gains and losses into short-term and long-term categories based on how long the asset was held before it was sold.
02
Long-Term Capital Gains
A capital asset held for more than one year is generally treated as a long-term asset when it is disposed of.
MORE THAN ONE YEAR
COST BASIS
Your adjusted basis helps determine whether the sale produces a gain or a loss.
Basis is generally your investment in an asset for tax purposes. For something you purchase, basis generally begins with its cost, although the rules can vary depending on how the asset was acquired.
Certain qualifying costs can increase basis. For property, improvements can potentially increase the basis, while depreciation and other adjustments can reduce it.
The adjusted basis is then compared with the amount realized from the sale. This is one of the central calculations behind a capital gain or capital loss.
CAPITAL GAIN CALCULATION
BASIS
01
Original Cost
Starting point for basis
02
Adjustments
Applicable increases and decreases
03
Adjusted Basis
Compared with amount realized
REAL ESTATE
Property sales can involve additional rules beyond the basic gain calculation.
When real estate is sold for more than its adjusted basis, the transaction can create a capital gain. Determining that gain can require more than looking at the original purchase price.
Improvements, depreciation and certain acquisition or selling costs can affect the property's adjusted basis or the amount realized. Good records can therefore be especially important for homeowners, landlords and real estate investors.
The sale of a qualifying main home may receive special tax treatment. Eligible taxpayers may be able to exclude up to $250,000 of gain, or up to $500,000 for certain married couples filing jointly, when the applicable ownership and use requirements are satisfied.
PROPERTY & TAX
Real estate gains can depend on basis, improvements and applicable exclusions.
CAPITAL LOSSES
A capital loss can become part of the tax calculation too.
A capital loss generally occurs when you sell or dispose of a capital asset for less than its adjusted basis. Capital losses can matter because federal tax rules generally allow capital losses to offset capital gains.
When capital losses exceed capital gains, individuals can generally deduct up to $3,000 of excess net capital loss against other income in a year, or $1,500 if married filing separately.
Unused capital losses can generally be carried forward to later tax years under the applicable rules. This is one reason investors should maintain records of transactions even after an investment has been sold.
NET INVESTMENT INCOME TAX
Some higher-income taxpayers may also need to consider the Net Investment Income Tax.
The Net Investment Income Tax, commonly referred to as NIIT, is a separate 3.8% federal tax that can apply to certain net investment income when modified adjusted gross income exceeds the applicable threshold.
The statutory threshold amounts are $200,000 for Single or Head of Household, $250,000 for Married Filing Jointly or qualifying surviving spouse, and $125,000 for Married Filing Separately.
The tax generally applies to the lesser of net investment income or the excess of modified adjusted gross income over the applicable threshold.
NET INVESTMENT INCOME TAX
3.8%
NIIT
3.8%
Single / Head of Household
$200K
Married Filing Jointly
$250K
Married Filing Separately
$125K
PUTTING THE CALCULATION TOGETHER
A simple framework can make a complicated sale easier to understand.
Capital gains calculations can involve several moving parts. Looking at the transaction in a consistent order can help you understand which numbers and rules need attention.
01
Identify the asset and transaction
Determine what was sold, when it was acquired and when it was disposed of.
02
Determine the amount realized
Review what you received from the transaction and applicable selling costs.
03
Review your adjusted basis
Start with the applicable cost and account for relevant basis adjustments.
04
Determine gain or loss
Compare the amount realized with the adjusted basis.
05
Apply the relevant tax rules
Consider holding period, losses, exclusions and other rules that apply to the transaction.
REPORTING A CAPITAL TRANSACTION
Tax reporting is another part of the process after an asset is sold.
Many capital asset transactions are reported using Form 8949, Sales and Other Dispositions of Capital Assets, with applicable results generally carried to Schedule D when required.
Brokerage firms may provide Form 1099-B and other transaction information for investments. Even so, taxpayers should review their records carefully because basis adjustments and transaction-specific details can affect the final reporting.
Property transactions can involve different documentation and reporting requirements depending on the type of property and the circumstances of the sale.
RELATED GROWTHSMARTLY GUIDES
Keep Exploring Taxes and Investing
Continue with existing GrowthSmartly resources to understand related tax and financial topics without creating unnecessary duplicate pages.
01
Tax Brackets
Understand federal tax brackets and how marginal tax rates work.
Explore Tax Brackets → 02Tax Deductions
Learn how deductions generally reduce taxable income.
Explore Tax Deductions → 03Tax Credits
Understand how tax credits can directly reduce eligible tax liability.
Explore Tax Credits → 04Investing
Explore investment concepts and long-term financial planning.
Explore Investing → 05Real Estate
Explore property decisions and the financial side of real estate.
Explore Real Estate → 06Financial Calculators
Use existing GrowthSmartly calculators for practical financial planning.
View Calculators →
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CAPITAL GAINS FAQ
Clear answers to common questions about capital gains tax.
FREQUENTLY ASKED QUESTIONS
Capital gains tax explained clearly.
A capital gain generally occurs when you sell a capital asset for more than its adjusted basis. The asset may be an investment, property or another qualifying capital asset.
Generally, assets held for one year or less are treated as short-term, while assets held for more than one year are generally treated as long-term.
In general, the amount realized from the sale is compared with the asset's adjusted basis. If the amount realized is greater, the transaction generally produces a gain.
Adjusted basis is the tax basis of an asset after applicable increases and decreases. The adjustments depend on the type of asset and the circumstances surrounding ownership.
Generally, yes. Capital losses can offset capital gains under federal tax rules. Individuals may also be able to deduct a limited amount of excess net capital loss against other income and carry unused losses forward.
Eligible taxpayers may be able to exclude up to $250,000 of gain from the sale of a qualifying main home, or up to $500,000 for certain married couples filing jointly, when the applicable requirements are met.
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