This article was updated for Tax Year 2023, last edited on December 20th, 2023.
This article provides a basic overview for understanding capital gains and losses, as well as how taxpayers can offset these gains and losses.
Highlights
When a capital asset (such as a home or stock share) is sold, the difference between the original cost of the asset and sale price determines if there's a capital gain or loss. Capital gains are typically taxed based on taxable income.
The difference between short-term and long-term capital gains or losses is based on how long you've owned the asset. If it's less than a year, it's typically short-term; if it's more than a year, it's typically long-term.
Capital gains can usually be offset by capital losses, meaning you can possibly reduce your net gains by your net losses to create a more favorable tax situation.
Capital losses cannot be offset if you do not have any capital gains, but you may be able to claim the losses to lower your taxable income.
What are capital gains and capital losses?
A capital asset can include a home, car, household items, and stocks and bonds for investments.
When you sell the asset, the difference between the original cost and the sales price generally determines either the capital gain or loss.
The 2023 tax rate associated with a capital gain can either be 0%, 15%, or 20%, which is determined based on your taxable income.
Tax Filing Status | 0% Tax Rate | 15% Tax Rate | 20% Tax Rate |
Single | $0 to $44,625 | $44,625 to $492,300 | $492,301 or more |
Married Filing Jointly | $0 to $89,250 | $89,250 to $553,850 | $553,851 or more |
Married Filing Separately | $0 to $44,625 | $44,625 to $276,900 | $276,901 or more |
Head of Household | $0 to $59,750 | $59,750 to $523,050 | $523,051 or more |
What is the difference between short and long-term capital gains and losses?
A short-term capital gain or loss: assets held for one year or less.
A long-term capital gain or loss: assets held for longer than one year.
Note: there are exceptions to this and you can read more about exceptions here.
How do I offset a capital gain?
You can offset a net capital gain by your net capital losses. This means you can reduce your gains by your losses and possibly end up with a more favorable tax situation.
Example:
Net gain: $20,000
Net loss: $5,000
With a net gain of $20,000 and a net loss of $5,000, you can reduce your gain to $15,000.
$20,000 net gain - $5,000 net loss = $15,000 net gain
How do I offset a capital loss?
If your capital losses exceed your capital gains, you can claim up to the amount of the gain. This means you can reduce your gains by your losses and have your losses be the difference, possibly ending up with a more favorable tax situation.
Example:
Net gain of $6,000
Net loss of $10,000
With a net loss of $10,000 and a net gain of $6,000, you can claim the loss and be left with the difference. This leaves you with a $4,000 net loss which can be carried forward for use in later tax years.
Net loss $10,000 - net gain $6,000 = $4,000 net loss
I have capital losses but no capital gains. Can I still offset the loss?
If you have capital losses and no capital gains, you won't be able to offset the loss. However, you may still be able to claim the loss to lower your taxable income. The amount you can claim to lower your income is typically limited to $3,000 (or $1,500 if married filing separately) and by the source of the loss (for example: losses from the sale of personal-use property, such as your home or car, aren't typically tax deductible).
You can read more about capital gains and losses here.
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