Gains and losses are like two sides of the same coin. There is always an equal possibility of either gaining or losing from a transaction. We would be happy to gain and sad for losing, but the IRS is going to give a 180º turn to your emotions. It is going to tax you for your capital gains and unburden your tax for bearing losses in capital transactions.
The Event:
You will encounter a gain or a loss when you have carried out a capital transaction of your asset. Your assets can be property, shares and stocks of companies, real estate or collectibles. You have to firstly own the asset and then you must have sold it during the assessment year. Capital Gain distributions from mutual funds are also treated as capital gain. A transaction with no gain no loss also must be reported to the IRS on your return. The IRS needs to keep the records of all the transactions as there are always two parties involved in any transaction and none of them should deceive the IRS.
Taxation:
Firstly, only gains are taxed and losses are squared off against gains. Capital transactions are categorized into two – short term capital gain (STCG) and long term capital gain (LTCG), according to the holding period. If the assets were held for more than a year then the gain would be treated as LTCG or else STCG. LTCG is taxed at low rate which is generally less than 20%. STCG will be taxed at a rate on which other incomes will be taxed. Capital gain distributions are mentioned on the 1099-DIV by the company. The amount in Box 2a will be considered as LTCG. STCG will be included in Box 1a with ordinary dividends as they are taxed at the same rate. If for the particular year you have a gain after reporting all the transactions, then it will be taxed amongst the other incomes. If you have a loss then a negative figure would reflect amongst other incomes. You can claim a loss of maximum limit that can be changed by the IRS, any amount exceeding that can be carried over to the next years to net against next year’s gain.
The main lookout here would be to know your carryovers, because that will matter a lot if you are gaining more in the following year.
