Knowing the difference between capital gains and losses, and how each factors into your tax return can make a big difference on your stress level. Continue reading to learn more about each.

Capital Gain

Profits made from the sale of assets, such as stocks, real estate and mutual funds is called capital gain. Short term gains are incurred from the sale of an asset held for less than a year, while long term capital gains are for sold property originally held for more than 12 months. Short term gains are taxed at your top bracket, while long term have more favorable rates. These special rates for long term gains don’t apply to all investment real estate profit, though. Additionally, higher income taxpayers may be subject to a 3.8% surtax on certain types of capital gains, such as the sale of collectible goods (taxed at 28%) and recaptured depreciation gains. Depreciation increases your profit dollar for dollar, and generally gains from depreciation are taxed at 25%.

Capital Loss

If you sell an asset like real estate, mutual funds, stocks, or bonds, and it results in a loss, you have incurred a capital loss. These losses can counter capital gains, and $3,000 worth of additional losses can be deducted from other income sources (retirement distributions, salary, etc.) There are long and short term losses, depending on the length of time the asset was in your possession, and they offset gains of the same term. When there is excess loss, it can be used against the other type of gain, then the additional $3,000 in excess loss can be deducted from income.

Capital Loss Carryover

Capital losses are able to be used to balance capital gains, as well as up to $3,000 of excess loss can be deducted from other income, such as salary or commission. You are able to carryover losses that exceed the limit into future tax years.