Investor View:

Calculating Capital Gains and Losses on Schedule D

Calculating capital gains and losses for the tax year is something that everyone who invests must go through. But does it really have to be so confusing? Not really. The trick here is to net your long term gains and losses separately from your short term gains and losses. Long term gains and losses result when investments are held for over one year and short term gains and losses result when investments are held for less than a year. Then when you are done figuring out your long term and short term gains and losses, you can either add the two or subtract one from the other to figure out your capital gains and losses for the year.

If you had only long term gains for the year, you get taxed at 20% or less depending on your tax bracket. The 20% rate is applied for the 28% tax bracket. Short term gains are taxed at your ordinary income tax rate, which is 39.6% or more. There is not much to figure out when you only have either short or long term gains. But what if you have both short term losses and long term gains? You can write off as much of the losses as the gain. Here is an example: This year Jake accrued $6000 in long term gains and $8500 in short term losses. Subtract his losses ($8500) from his gains ($6000). The result is that Jake has $2500 in net losses (-$2500). The IRS offers you a break here giving you the oppurtunity to write off as much as $3000 in losses against ordinary income. So for the remaining $2500, Jake gets a deduction.

What if all you had was losses? This is where it gets a little tricky. You need to offset your short term losses first, before you do your long term losses, using the $3000 max deduction the IRS has set. The remaining losses get carried over to the next year but what if you had long term losses and short term gains on your investments? First you have to figure out which is bigger. If the short term gain is bigger, you just pay ordinary income taxes on the gain. If the long term loss is bigger, you can write off as much as $3000. If there is still some remaining losses after that, they can be carried over to the next year.

The lesson to be learned here is always try to dump off your losing short term investments by December 31st, especially if your long term gains are higher. This way you get a deduction for whatever loss you had and you pay taxes in the 20% rate compared to 39.6% rate on your gains. However, if your short term gains are larger, try dumping some of your long term investments that are losing money for you. This way you can offset some of the tax you will pay on the gains.