The Taxpayer Relief Act of 1997 and the IRS Restructuring and Reform Act of 1998 made major changes in the taxation of capital gains.

Almost everything you own and use for personal purposes or investment is a capital asset, including 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, select 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. If you hold it more than one year, your capital gain or loss is long term. If you hold it one year or less, your capital gain or loss is short term.

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. However, if you have a net capital gain, a lower maximum tax rate may apply. The term "net capital gain" means the amount by which your net long-term capital gain for the year is more than any net short-term capital loss. Beginning in 1998, the highest tax rate on a net capital gain is generally 20%, 10% to the extent that, if there were no maximum capitol gain rates, the net capital gain would be taxed at the 15% regular tax rate. There are 3 exceptions:

• Exception 1) Property sold after July 28, 1997 but before January 1, 1998, must be held more than 18 months to qualify for the 25%, 20% or 10% rate. If it is not held for more than 18 months, the maximum rate is 28%.
• Exception 2) Net capital gain from selling collectibles such as coins or art, and a portion of the gain from qualified small business stock held for more than 5 years, is taxed at a maximum 28% rate.
• Exception 3) The part of any net capital gain from selling Section 1250 real property that is due to prior straight line depreciation is taxed at a maximum 25% rate.

If you have a capital gain on the sale of your main home, special rules apply. Select 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. Select 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.

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 and forms may be downloaded from this site or ordered by calling 1-800-829-3676.

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