CAPITAL GAINS TAX

The IRS requires that you report gains and losses on investments in the year you realize the gains or losses. However, there are different tax rates for long-term and short-term gains.

Short-term gains are taxed at your ordinary income tax bracket rate, while long-term rates are lower. This is to encourage long-term investing.

You may subtract your realized capital losses from your realized capital gains to calculate your net short-term gains and net long-term gains. Your maximum tax rates for net capital gains are shown in the table below.

If your losses exceed your gains, you can deduct up to $3,000 of net losses from taxable income. Any losses over $3,000 carry over indefinitely to following years until they are used up.

In addition, special rules apply for gains on the sale of a principal residence. For example, once every two years you can also deduct up to $250,000 from gain on the sale of a principal residence, owned and used for at least 2 of 5 years before the date of sale. This amount may be as much as $500,000 for a married couple filing jointly.

Now let's take a look at what is and isn't subject to capital gains taxes.