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Tax FAQ:

Capital Gains, Losses & Investments

Understand Capital Gains, Losses & Investments and the tax rules affecting the sale, exchange, and ownership of investment property.

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Capital Gains, Losses & Investments

A capital asset is generally property held by a taxpayer for investment or personal purposes rather than property held primarily for sale to customers in the ordinary course of a business.

Common examples can include stocks, bonds, investment property, and certain other property held for investment or personal purposes.

Generally, a personal residence can be considered a capital asset, although special tax rules may apply when the property is sold.

Generally, stocks and bonds held as investments are capital assets.

Generally, inventory held for sale to customers in the ordinary course of business is not treated as a capital asset.

The classification can affect how gains and losses from the sale or exchange of property are calculated and reported.

The sale generally results in a gain or loss determined by comparing the amount realized with the property’s adjusted basis.

Basis generally represents the taxpayer’s investment in property for tax purposes and is used to determine gain or loss.

Yes. Basis can be adjusted for certain improvements, depreciation, distributions, and other transactions.

Accurate records help establish the property’s basis, acquisition date, improvements, sales proceeds, and other information needed to calculate the correct gain or loss.

A capital gain generally occurs when a taxpayer sells or exchanges a capital asset for more than its adjusted basis.

Generally, the gain is determined by subtracting the property’s adjusted basis and applicable selling expenses from the amount realized.

No. The applicable tax treatment can depend on factors such as the type of asset, how long it was held, and the taxpayer’s circumstances.

A realized gain generally occurs when a taxpayer disposes of an asset in a transaction that produces a gain.

Generally, an increase in value alone does not create a realized gain. Tax consequences typically arise when the investment is disposed of or another taxable event occurs.

Yes. The sale or exchange of investment or other capital property can produce a capital gain.

Yes. Selling investment securities for more than their adjusted basis can produce a capital gain.

Potentially. The holding period can determine whether a gain is generally treated as short-term or long-term.

Generally, capital losses can offset capital gains, subject to applicable tax rules and limitations.

Accurate calculations help ensure that the correct amount of taxable gain is reported and that applicable tax treatment is properly applied.

A capital loss generally occurs when a taxpayer sells or exchanges a capital asset for less than its adjusted basis.

Generally, capital losses can be used to offset capital gains, subject to applicable rules.

Individuals may generally be able to deduct a limited amount of net capital loss against ordinary income, subject to applicable limitations.

The taxpayer may have a net capital loss that can potentially be used against other income within applicable limits, with additional losses potentially carried forward.

Individuals may generally carry forward certain unused net capital losses to future tax years.

A realized capital loss generally occurs when the taxpayer actually disposes of the investment or property in a transaction producing a loss.

Generally, no. A decline in value alone does not necessarily create a recognized tax loss.

Generally, yes, when the stocks are held as capital assets and are sold or otherwise disposed of for less than their adjusted basis.

Potentially. The tax treatment depends on how the property was held and the circumstances of the disposition.

Accurate records are important for determining current-year deductions and properly tracking losses that may be available in future years.

Digital assets generally include assets that are recorded electronically on distributed ledgers or similar technology, including certain cryptocurrencies and other digital property.

Generally, cryptocurrency is treated as property rather than traditional currency for federal income tax purposes.

A sale or other taxable disposition of cryptocurrency can result in a capital gain or loss when the asset is held as a capital asset.

Yes. A cryptocurrency-to-cryptocurrency exchange can potentially constitute a taxable disposition.

Potentially. Spending cryptocurrency can constitute a disposition that may produce a gain or loss.

The basis generally represents the taxpayer’s investment in the cryptocurrency and is used to calculate gain or loss when the asset is disposed of.

It can. The tax treatment depends on why and how the digital asset was received.

Generally, receiving digital assets for providing services can create taxable income based on the applicable rules and circumstances.

Taxpayers should maintain records of purchases, sales, exchanges, transfers, dates, amounts, values, and other information needed to determine tax consequences.

Potentially. A recognized loss may be deductible depending on how the digital asset was held and the circumstances of the transaction.

An investment asset is generally property acquired or held with the expectation of producing income or increasing in value.

Examples can include stocks, bonds, mutual funds, certain real estate, and other assets held for investment.

Generally, investment assets that qualify as capital assets can be subject to capital-gain and capital-loss rules.

The taxpayer generally determines a gain or loss by comparing the amount realized with the asset’s adjusted basis.

Yes. Dividends from investments can constitute investment income and may receive different tax treatment depending on the circumstances.

Yes. Interest earned from investments can generally constitute taxable investment income unless a specific exclusion or special rule applies.

Yes. Certain investment real estate can generate rental income in addition to potential appreciation.

Yes. Investments can increase or decrease in value, although a decline generally does not become a recognized tax loss until applicable recognition requirements are met.

Basis is important for determining taxable gains and losses when investments are sold or otherwise disposed of.

Yes. Transaction records help establish acquisition costs, sales proceeds, dates, fees, basis, and other information needed for accurate tax reporting.

A long-term capital gain generally results from the sale or exchange of a capital asset that has been held for more than one year.

Generally, it is calculated by comparing the amount realized from the sale with the asset’s adjusted basis.

Generally, long-term capital gains may qualify for preferential federal tax rates, depending on the taxpayer’s circumstances.

For many capital assets, the holding period must be more than one year.

The holding-period calculation follows specific tax rules and generally considers the dates of acquisition and disposition.

Yes. Capital losses can generally be used to offset capital gains, subject to applicable rules.

Yes. Netting rules determine how short-term and long-term gains and losses are combined.

Yes, if the stocks are capital assets and meet the applicable holding-period requirement.

Potentially. The treatment depends on how the property was held and the circumstances of the sale.

The holding period can significantly affect the tax treatment of a capital gain or loss.

A realized gain generally occurs when a taxpayer disposes of property for more than its adjusted basis.

A realized gain may be taxable, although certain transactions may qualify for an exclusion, deferral, nonrecognition treatment, or other special rule.

Generally, an increase in the value of an asset that has not been disposed of is an unrealized gain and generally does not create a taxable gain by itself.

Yes. Selling stock for more than its adjusted basis generally creates a realized gain.

Yes. An exchange can produce a realized gain even though special rules may determine whether and when that gain is recognized for tax purposes.

The amount realized generally represents the value received in a disposition, including applicable cash, property, and certain liabilities.

The gain is generally determined by comparing the amount realized with the property’s adjusted basis.

Yes. A sale for less than adjusted basis can produce a realized loss.

Proper documentation helps support the transaction date, proceeds, basis, fees, and calculation of the resulting gain.

Certain transactions may allow gain recognition to be deferred under specific tax provisions, depending on the type of transaction and applicable requirements.

A realized loss generally occurs when property is disposed of for less than its adjusted basis.

No. Recognition and deductibility depend on the type of property, transaction, taxpayer, and applicable tax rules.

Yes. Selling investment stock for less than its adjusted basis generally produces a realized loss.

Generally, recognized capital losses can offset capital gains under applicable netting rules.

Certain unused capital losses may be carried forward under applicable rules.

Generally, no. A decline in market value usually remains an unrealized loss until a taxable disposition occurs.

Yes. The adjusted basis is generally compared with the amount realized to determine the gain or loss.

Yes. A transaction may produce a realized loss while separate tax rules determine whether the loss is currently recognized.

Records help substantiate the property’s basis, sales proceeds, transaction date, expenses, and calculation of the loss.

Potentially. Recognized losses may reduce taxable gains and, in certain circumstances, other income subject to applicable limitations.

Securities generally include financial investments such as stocks, bonds, and certain other investment instruments.

Securities held as investments are generally treated as capital assets, although special circumstances can produce different treatment.

The sale generally results in a gain or loss based on the difference between the amount realized and adjusted basis.

Basis generally represents the taxpayer’s investment in the security and is used to determine gain or loss upon disposition.

Certain transaction costs can affect the amount realized or basis and therefore can affect the resulting gain or loss.

Yes. Stocks and certain other investments can generate dividends.

Yes. Bonds and other debt investments can generate interest income.

Yes. Selling securities for less than their adjusted basis can produce a capital loss when applicable recognition requirements are met.

Brokerage statements can provide important information about purchases, sales, dividends, distributions, basis, and transaction dates.

Yes. Certain transactions involving securities can be subject to specialized rules that affect the recognition or calculation of gains and losses.

A short-term capital gain generally results when a taxpayer sells or exchanges a capital asset held for one year or less.

Short-term capital gains are generally taxed at applicable ordinary income tax rates rather than the preferential rates generally available for long-term capital gains.

Yes. If the stock is a capital asset and is held for one year or less, a gain may generally be classified as short-term.

Yes. Capital losses are generally netted against capital gains according to applicable tax rules.

Yes. The tax rules generally provide for netting short-term and long-term gains and losses in a specified order.

Generally, an asset must be held for more than one year to receive long-term capital-gain treatment.

Potentially. Digital assets held as capital assets and disposed of after one year or less can produce short-term capital gains.

It can. The classification of property and the taxpayer’s activities can affect how income and gains are treated.

The acquisition date is important for determining the holding period and whether a gain or loss is short-term or long-term.

Yes. Accurate transaction dates are essential for correctly determining holding periods and tax treatment.

Stocks generally represent an ownership interest in a corporation or other entity.

Bonds generally represent debt investments under which the issuer owes obligations to the bondholder.

Yes. Stocks can generate dividends, and selling stocks can result in capital gains or losses.

Yes. Bonds can generate interest income, and selling bonds can potentially create capital gains or losses.

The investor generally calculates a gain or loss by comparing the sale proceeds with the stock’s adjusted basis.

The sale can produce a gain or loss based on the bond’s adjusted basis and the amount realized.

The purchase price generally forms part of the stock’s initial basis, which is used to determine gain or loss when the stock is sold.

Yes. Certain corporate actions, reinvested amounts, distributions, and other events can affect basis.

Yes. Investors should maintain records of purchases, sales, reinvestments, distributions, fees, dates, and basis information.

Yes. Stocks and bonds can be held within certain retirement accounts, where different tax rules may apply to transactions and distributions.

A worthless security is generally a stock or other security that has become completely without value. Special tax rules may determine when a loss from a worthless security is treated as occurring.

Potentially. A taxpayer may generally be able to recognize a loss when a security becomes completely worthless, subject to applicable tax rules.

A security generally must have no value and no reasonable prospect of recovering value for it to be considered completely worthless for tax purposes.

No. A stock that has declined significantly in value is not necessarily worthless. The distinction between a severely reduced value and complete worthlessness is important.

When the applicable requirements are met, the loss is generally treated as a capital loss if the security was held as a capital asset.

The loss is generally based on the taxpayer’s adjusted basis in the security when the security becomes completely worthless, subject to applicable tax rules.

Taxpayers should retain purchase records, brokerage statements, basis information, evidence concerning the security’s worthlessness, and other documentation supporting the claimed loss.

Potentially, but simply ceasing operations does not automatically establish that a security is worthless. The facts must support the determination that the security has become completely worthless.

The timing of the loss is important. Generally, the loss must be associated with the tax year in which the security became completely worthless under the applicable rules.

Claiming the loss in the wrong tax year can result in an inaccurate tax return and may require the taxpayer to correct the filing.

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