Most property you own and use for personal or investment purposes is a capital asset. For example, a house, furniture, car, stocks, and bonds are capital assets.
A capital asset is any property held by you except the following.
Investment property is property held for the production of income or anticipated appreciation in value. A gain or loss from the sale or exchange of investment property, such as stocks and bonds, is a capital gain or loss.
Capital gains and losses must be separated according to how long you held or owned the property.
The holding period for short-term capital gains and losses is one year or less.
The holding period for long-term capital gains and losses is more than one year.
Inherited property is considered held long term regardless of actual time held by you, the beneficiary.
For securities traded on an established securities market, the holding period begins the day after the trade date the securities are purchased and ends on the trade date the securities are sold.
A mutual fund is a regulated investment company generally created by “pooling” funds of investors to allow them to take advantage of a diversity of investments and professional management.
Shares in a mutual fund may be acquired at various times, in various quantities, and at various prices. When shares of a mutual fund are sold, it is necessary to determine which shares were sold and the basis of those shares. You can use either a cost basis or an average basis to calculate gain or loss.
Cost basis can be used only if you did not previously use an average basis for a sale of other shares in the same mutual fund. To calculate cost basis, use one of the following methods.
Average basis is calculated by dividing the total cost of shares owned by the total number of shares owned. Once average basis is used to report gain or loss from a mutual fund, it must be used for all accounts in the same fund. However, you may use a different method of calculating the basis for other mutual funds, even those within the same family of funds.
Any exchange of shares in one fund for shares in another fund is treated as a sale. This is true even if shares in one fund are exchanged for shares in another fund within the same family of funds.
Reinvested dividends are dividends paid that you opt to use to buy more shares of stock rather than receive the dividends in cash. The dividends are reported as income, and the shares of stock owned and cost basis increases.
Tax rates that apply to net capital gain are generally lower than tax rates that apply to other income. These lower rates are called “maximum capital gain rates.” Net capital gain is the amount by which net long-term capital gain for the year is more than net short-term capital loss. The maximum capital gain rates are 0%, 15%, 20%, 25%, and 28%. If tax is calculated using the maximum capital gain rate, and the regular tax computation results in a lower tax, the regular tax computation applies.
Note: These rates apply when taxable income exceeds the 24% tax bracket for regular income tax purposes.
Capital gain distributions are paid by a mutual fund or real estate investment trust (REIT) from net realized long-term capital gains.
If capital losses are more than capital gains, the difference must be deducted even if there is no ordinary income to offset it. The annual limit on the amount of capital loss that can be deducted is $3,000 ($1,500 for Married Filing Separately).
DISCLAIMER: This article contains general information for U.S. taxpayers and should not be relied upon as the only source of authority. Seek out professional tax, legal, or financial advice from CryptoTaxAudit or from other reputable companies.