Capital assets are any property, investments in stocks or bonds, cars, boats, or anything that you own, be it for personal use or for business use. When you sell a capital asset for more than what you paid for it, you have a capital gain.
Many times, taxpayers find themselves in debt when they sell a capital asset and don’t report their earnings. The IRS requires you to report and pay taxes on every capital gain. Lack of information about this tax rule has led many to incur tax debt without realizing it.
Capital gains are taxed differently according to whether they are long term or short term gains. Long term capital gains, the net gains from an asset you’ve held for a year or longer, are typically taxed at no greater than 15 percent (this can be higher if you’re in the top tax bracket of 39.6%). Short term capital gains, the net gains from an asset you’ve held less than a year, are taxed according to your ordinary income tax rate within your tax bracket.
In order to avoid a tax debt, it’s important to include the correct amount of capital gains with your income on your tax return. Understatement of income is a common cause of tax debt. According to the IRS, incorrect reporting of capital gains is responsible for about $345 billion unpaid taxes per year.
If you have a capital loss, it means that the amount you received after selling a capital asset is less than what you paid when you purchased it. If this is the case, you may be able to take a deduction on certain types of capital losses. Capital losses on the sale of investment property are deductible whereas losses on the sale of capital assets that are for personal use are not deductible.
You should report capital gains and deductible capital losses on Form 1040, Schedule D, Capital Gains and Losses; then transferred to line 13 of Form 1040. When selling any capital asset, make sure to report and pay the correct amount of taxes; having unpaid taxes will result in having to pay more to the IRS in penalties and interest.