Tax 2017: Will You Have a Capital Loss or Gain?

Capital-loss deductions can take the sting out of investment losses and reduce your tax return – if you understand how to use them.

A capital loss occurs when a capital asset (such as an investment) drops in value and is subsequently sold.

To determine if you have a capital loss, you will need to determine your basis, which is what you paid for an asset plus any other costs you incurred to acquire it, including sales taxes and commissions.

If you sold it for less than its basis, you have a capital loss. If you sold it for more, you have a capital gain.

When you have a capital loss, you must first use it to reduce any capital gains you have. Any capital losses left over can be deducted from your income up to $3,000 per year.

If your losses exceed $3,000, you can carry them forward indefinitely. So, if you have $5,000 in capital losses in 2017, you can deduct $3,000 of those losses on your 2017 return and carry the remaining $2,000 forward to your 2018 return.

Capital Gains

If you have capital gains instead of capital losses, the situation changes. The way capital gains are taxed depends on whether it’s a long-term or a short-term gain.

If you hold the asset for more than one year, your capital gain or loss is long term. If you hold the asset for one year or less, it’s considered short term.

Short-term capital gains are taxed at the same rate as other income.

On the other hand, long-term capital gains are taxed at a much lower rate: 0% if you are in the 10% or 15% income-tax bracket; 15% if you are in the 25%, 28%, 33%, or 35% income-tax bracket; and 20% if you are in the 39.6% income-tax bracket.