In the tax world, a capital gain or capital loss results from the sale of an asset.
To calculate the gain or loss, you need to know two things:
- Your basis in the asset
- How much you received when you sold the asset
Basis
Basis means your stake in the asset. For most assets, your basis will be what you originally paid for it, minus any depreciation deductions taken against the asset.
If the asset is an investment in a partnership or S-Corporation, your basis is what you originally paid for your ownership stake, adjusted by the yearly profit or loss of the business, any withdrawals you’ve taken or additional money you’ve paid in, and various other factors.
(Note: this is a very, very basic overview of basis.)
Gain or Loss
If you sold the asset for more than your basis, you have a capital gain. If you sold the asset for less than your basis, you have a capital loss.
The tax treatment of that gain or loss varies. Long-term gains result from the sale of assets you’ve held for more than one year. Special tax rates apply to long-term gains. Short-term capital gains are typically considered ordinary income, meaning no special tax rates apply.
This is a general discussion of gains and losses. It can get complicated if you’re selling business property and depreciation was claimed, some or all of the gain may be considered short-term, even though you’ve held the asset for more than one year. This is called depreciation recapture, and is a different topic for a different day.
Losses
Capital losses can be deducted on your personal tax return but are generally limited to a maximum deduction $3,000 per year.