Taxes on the Sale of Various Types of Personal Property

The information on this page was taken from the IRS website

Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When you sell a capital asset, the difference between the adjusted basis in the asset and the amount you realized from the sale is a capital gain or a capital loss. Generally, an asset's basis is its cost to the owner, but if you received the asset as a gift or inheritance, refer to Topic No. 703 for information about your basis. For information on calculating adjusted basis, refer to Publication 551, Basis of Assets. You have a capital gain if you sell the asset for more than your adjusted basis. You have a capital loss if you sell the asset for less than your adjusted basis. Losses from the sale of personal-use property, such as your home or car, aren't tax deductible.

Short-Term or Long-Term

To correctly arrive at your net capital gain or loss, capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. For exceptions to this rule, such as property acquired by gift, property acquired from a decedent, or patent property, refer to Publication 544, Sales and Other Dispositions of Assets; for commodity futures, see Publication 550, Investment Income and Expenses; or for applicable partnership interests, see Publication 541, Partnerships. To determine how long you held the asset, you generally count from the day after the day you acquired the asset up to and including the day you disposed of the asset.

If you have a net capital gain, a lower tax rate may apply to the gain than the tax rate that applies to your ordinary income. The term "net capital gain" means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss for the year. The term "net long-term capital gain" means long-term capital gains reduced by long-term capital losses including any unused long-term capital loss carried over from previous years.

Capital Gain Tax Rates

The tax rate on most net capital gain is no higher than 15% for most individuals. Some or all net capital gain may be taxed at 0% if your taxable income is less than or equal to $40,400 for single or $80,800 for married filing jointly or qualifying widow(er).

A capital gain rate of 15% applies if your taxable income is more than $40,400 but less than or equal to $445,850 for single; more than $80,800 but less than or equal to $501,600 for married filing jointly or qualifying widow(er); more than $54,100 but less than or equal to $473,750 for head of household or more than $40,400 but less than or equal to $250,800 for married filing separately.

However, a net capital gain tax rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate.

There are a few other exceptions where capital gains may be taxed at rates greater than 20%:

The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.

Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.

The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.

Note: Net short-term capital gains are subject to taxation as ordinary income at graduated tax rates.

Limit on the Deduction and Carryover of Losses

If your capital losses exceed your capital gains, the amount of the excess loss that you can claim to lower your income is the lesser of $3,000 ($1,500 if married filing separately) or your total net loss shown on line 16 of Schedule D (Form 1040). Claim the loss on line 7 of your Form 1040 or Form 1040-SR. If your net capital loss is more than this limit, you can carry the loss forward to later years. You may use the Capital Loss Carryover Worksheet found in Publication 550, Investment Income and Expenses or in the Instructions for Schedule D (Form 1040)PDF to figure the amount you can carry forward.

Collectibles

Long-term investments in collectibles are taxed at a flat 28%. Short-term investments in collectibles are taxed as short-term capital gains at your ordinary income tax rates. Collectibles include the following items:

• stamps,
• coins,
• precious metals,
• precious gems,
• rare rugs,
• antiques,
• alcoholic beverages, and
• fine art.

Certain precious metal coins and bullion are considered regular investment assets and are not considered collectibles for tax purposes under Internal Revenue Code Section 408(m)(3).

Real Estate

Real property will be taxed either as a short-term capital gain, long-term capital gain, or ordinary gain, depending on how you used the property. Rental real estate will be taxed as a combination of capital gain and depreciation recapture tax rates.

Business Assets

Fixed assets used in your business are taxed as ordinary gains. Business assets include all furniture, equipment, and machinery used in a business venture. Examples include computers, desks, chairs, and photocopiers. Ordinary gains are reported on IRS Form 4797.

Small Business Stock

Capital gains and losses on small business stock may qualify for preferential tax treatment. Gains may be partially excluded under Section 1202, Gain on Small Business Stock, if the company had total assets of $50 million or less when the stock was issued. Losses may be treated as ordinary losses up to $50,000 per year under Section 1244, Loss on Small Business Stock, if the company had total paid-in capital of $1 million or less.

Small business investors can request that companies certify their stock as qualifying under Section 1202, Section 1244, or both, at the time they make an investment in the company.

Gains on small business stock are taxed at 28% after the partial exclusion. Ordinary losses on Section 1244 stocks can reduce other ordinary income, such as wages.

The capital gains tax rates are determined by the type of investment asset and the holding period of the asset.

In additional to the federal capital gains tax rates, your capital gains will also be subject to state income taxes. Many states do not have separate capital gains tax rates. Instead, most states will tax your capital gains as ordinary income subject to the state income taxes rates.

Tax Rate on Dividend Income

Dividends are classified either as ordinary dividends or as qualified dividends. Ordinary dividends are taxed at your ordinary tax rates for whatever tax bracket you are in. Qualified dividends are taxed at a 15% percent rate. To be eligible as a qualified dividend, the dividends must be from a domestic corporation or a qualifying foreign corporation and you must hold the stock "for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date." (Publication 550.)

Tax Rate on Recaptured Depreciation of Real Property

Real property that has been depreciated is subject to a special depreciation recapture tax. A special 25% tax rate applies to the amount of gain that is related to depreciation deductions that were claimed or could have been claimed on a property. The remainder of the gain will be ordinary or long-term gains, depending on how long the property was held.

Mutual Funds and Capital Gains

You will need to calculate capital gains on each share of the fund you are selling. If you have invested in a fund over a period of time, then you will have different cost basis for your initial investment, additional investments, and any purchases made through reinvested dividends. Each investment has its own cost basis and its own holding period.

Capital Gains Distributions

Mutual funds often sell profitable investments at certain times throughout the year. The funds then distribute the profits to shareholders in the form of a capital gain distribution. Capital gains distributions are reported on Form 1099-DIV, which shows dividends and capital gains distributions paid throughout the year. Capital gains distributions are taxed at long-term capital gains tax rates, no matter how long you have personally owned shares in the mutual fund.

Capital gain distributions can be reported directly on Form 1040 if you have no other capital gains to report. Otherwise, capital gain distributions are reported on Schedule D along with your other gains and losses.

Capital Gains When Selling Mutual Fund Shares

You will calculate your capital gain or loss for every mutual fund share you are selling. If you have invested in a fund over a period of time, you will have a different cost basis and different holding period for each share you own.

The IRS allows you to use four different accounting methods for calculating your gain. You can use the method which is most advantageous to you. However, once you choose your accounting method for a particular mutual fund, you must stick with that method. You can choose different accounting methods for each mutual fund you own. The four allowable accounting methods are:

1. Actual cost basis using specific identification,
2. Actual cost basis using first-in, first-out identification,
3. Average cost basis, single-category method, and
4. Average cost basis, double-category method

Specific Identification of Mutual Fund Cost Basis
The specific identification method of accounting is the preferred method for savvy investors. You will need to keep track of each lot of shares you buy and sell. Moreover, your broker must allow you to sell specific shares. This option is usually provided with a mutual fund company's cost basis tracking service.

Specific identification enables the investor to choose which shares to sell for the greatest possible tax benefit. An investor may want to sell the most profitable shares to offset other losses, or may want to sell the least profitable shares to minimize the capital gains tax.

First-In, First-Out Method of Identification
Even if the shareholder cannot specific particular shares to sell, the actual cost basis method can still be used. You keep track of your cost basis for every lot of shares you buy. When calculating your gain, you assume that the first shares sold are the first shares you bought.

Average Cost Basis, Single Category Method
You calculate your average cost basis based on the price paid for each share you bought, including any reinvested dividends and reinvested capital gains. The average cost basis is the total purchase price of all shares divided by the number of shares owned. When you sale some shares, it is assumed the shares are sold on a first-in, first-out basis. Your capital gain is calculated using the holding period of the oldest shares being sold, even if you are selling a mixture of long-term and short-term shares.

Average Cost Basis, Double Category Method
You calculate your average cost basis based on the price paid for each lot of shares you bought, including any reinvested dividends and reinvested capital gains. However, you must separate your shares into long-term and short-term investments, and then calculate average cost basis for each category of shares. The average cost basis is the total purchase price of all shares of the same category divided by the number of shares owned in that category. When you sell some shares, it is assumed the shares are sold on a first-in, first-out basis.

Reinvested Dividends and Capital Gains Distributions

Many investors re-invest dividends and capital gains distributions received from their mutual funds. Each reinvestment is both a cash distribution and an additional fund purchase. The dividends and capital gains distributions are included taxable income. The additional shares purchased in the reinvestment have their own cost basis (the purchase price of the shares) and their own holding period.