The 1997 Taxpayer Relief Act made major changes in capital gains for assets sold after May 6, 1997.

Almost everything you own and use for personal purposes or investment is a capital asset. Examples are your home, household furnishings, and stocks or bonds held in your personal account. When you sell a capital asset, 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. If you did not buy the asset yourself, refer to Topic 704 for information about basis. You have a capital gain if you sell your asset for more than your basis. You have a capital loss if you sell your asset for less than your basis. Losses from the sale of personal-use property, such as your home or car, are not deductible.

Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. The 1997 Relief Act changed the holding periods for capital assets. For assets sold before May 7, 1997, the holding period for long term capital assets is more than one year. For assets sold between May 7, 1997 and July 28, 1997 and held for more than one year, these "mid-term gains" are considered long term. After July 28, 1997, capital assets are not considered long term unless held more than eighteen months. Assets not qualifying for long term treatment are short term capital assets which are taxed at the ordinary income rate.

You must report capital gains and losses on Schedule D of Form 1040. You pay tax on capital gains just as you pay tax on other types of income. From January 1,1997 through May 6, 1997, the highest income tax rate on net long-term capital gain income is 28%. Capital assets considered "collectibles" such as coins or art remain taxable at a maximum 28% rate. After May 6, 1997, the highest long term capital gains tax rate is 20 percent, 10 percent for those in the 15 percent tax rate. The recaptured portion of depreciation on Section 1250 real property is taxed at a maximum 25% rate.

For additional information on future capital gain and loss tax changes see Publication 553, Highlights of 1997 Tax Changes. If you have a capital gain on the sale of your main home, special rules apply. Refer to Topics 701, 702, and 703, or order Publication 523 for specific information related to home sales. If you have a taxable capital gain, you may be required to make estimated tax payments. Refer to Topic 355 or order Publication 505 for additional information on estimated tax.

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, or $1,500 if you are married filing separately. If your net capital loss is more than this limit, figure the amount of loss that can be carried forward to later years by using the Capital Loss Carryover Worksheet in the instructions for Schedule D.

At the time this topic was written, Congress was considering legislation that may effect the reporting of Capital Gains and Losses. For information on changes please call 1-800-829-1040. Additional information on capital gains and losses is available in Publication 550, Investment Income and Expenses; and Publication 544, Sales and Other Dispositions of Assets. Publications can be ordered by calling 1-800-829-3676 or downloaded from this web site.

Tax Topics & FAQs | Tax Help Archives | Home