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?

Net capital gains. 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 2013 capital gains tax rate of 15 percent (20 percent if you are in the highest income tax bracket, or, zero percent if you are in the 10 percent or 15 percent tax bracket). If the result is a short-term gain, it will be subject to tax at your regular income tax rate.

Tip

Beginning in 2013, a new 3.8 percent net investment income tax may be imposed on individuals whose modified adjusted gross income exceeds $250,000 for joint filers, $125,000 for married taxpayers filing separately, and $200,000 for others. Trusts and estates with income over a certain amount are also subject to the NII tax. Form 8960, Net Investment Income Tax� Individuals, Estates, and Trusts is attached to the tax return. For 2013, the IRS has provided taxpayers the ability to rely on more than one set of net investment income tax rules. The best choice varies by taxpayers and depends on the taxpayer's unique situation. Consult your advisor to determine which approach would be best for you.

Net capital loss. If the result is a loss, whether short-term or long-term, your loss deduction for the year is limited to $3,000 (or $1,500 for married people filing separately). 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.)