Question 1

Step 1: Calculate individual gains and losses.

Accepted Answer

For every asset sold during the year, apply the formula: Proceeds - Adjusted Cost Basis = Gain (or Loss). 
Example: You sell Stock A for $10,000. Your adjusted cost basis was $6,000. Your gain is $4,000. You sell Stock B for $3,000. Your adjusted basis was $5,000. Your loss is -$2,000.

Question 2

Step 2: Segregate and net by holding period.

Accepted Answer

Separate all transactions into short-term (held 1 year or less) and long-term (held > 1 year). Sum all short-term gains and subtract all short-term losses to find your Net Short-Term Capital Gain/Loss. Do the exact same for long-term transactions to find your Net Long-Term Capital Gain/Loss.

Question 3

Step 3: Net the nets.

Accepted Answer

If your net short-term and net long-term results are both gains, they are taxed separately at their respective rates. However, if one is a gain and the other is a loss, you must net them against each other. 
Example: You have a Net Short-Term Gain of $10,000 and a Net Long-Term Loss of -$4,000. You combine them ($10,000 - $4,000 = $6,000). Because the short-term gain was larger, the resulting $6,000 is taxed entirely as a short-term capital gain at your ordinary income rate.

Question 4

Full Worked Example:

Accepted Answer

Imagine an investor in 2024 who earns a $90,000 salary (Single filer). 
During the year, they have the following transactions:

Question 5

Do I have to pay state capital gains taxes in addition to federal taxes?

Accepted Answer

Yes, in the vast majority of cases, you must pay both. While the federal government offers preferential lower rates for long-term capital gains, most state governments do not. States like California, New York, and New Jersey tax capital gains at your standard state ordinary income tax rate, which can add up to 13.3% to your total tax burden. However, there are nine states—including Texas, Florida, Nevada, and Washington (with some recent specialized exceptions)—that have no broad state income tax, meaning residents of those states pay exactly 0% in state capital gains taxes, drastically altering their net investment returns.

Question 6

What happens if my capital losses exceed my capital gains for the year?

Accepted Answer

If your total capital losses are greater than your total capital gains, the IRS allows you to use the net loss to offset your ordinary wage income, up to a strict limit of $3,000 per year ($1,500 if married filing separately). If your net capital loss is $20,000, you will deduct $3,000 from your ordinary income this year, and the remaining $17,000 will be "carried forward" to next year. You can continue carrying forward these losses indefinitely until they are entirely used up to offset future gains or ordinary income, making loss tracking a vital multi-year accounting process.

Question 7

Can I avoid capital gains tax by reinvesting the money into another stock?

Accepted Answer

No, you cannot. A common misconception among retail investors is that if they sell a stock and immediately use the proceeds to buy a different stock, they have not realized a gain. The IRS views the sale of the first stock as a finalized, taxable event, regardless of what you do with the cash afterward. The only exception to this rule is a Section 1031 Exchange, which allows real estate investors to defer capital gains taxes by rolling the profits from one investment property directly into another "like-kind" property. This loophole does not apply to stocks, bonds, or cryptocurrencies.

Question 8

Does the wash sale rule apply across different brokerage accounts?

Accepted Answer

Yes, the wash sale rule applies to you as an individual taxpayer, not to your specific brokerage accounts. If you sell shares of Microsoft at a loss in your Robinhood account, and buy shares of Microsoft the very next day in your Fidelity account, you have triggered a wash sale. The IRS specifically requires brokers to report transactions, and their automated matching systems will flag identical purchases across multiple platforms. Furthermore, the IRS has ruled that buying the identical asset in your IRA or your spouse's account also triggers the wash sale rule, permanently disallowing the loss.

Question 9

How is capital gains tax calculated on inherited real estate?

Accepted Answer

When you inherit real estate, the property receives a "step-up in basis" to its fair market value on the exact date of the original owner's death. If your parents bought a house in 1980 for $50,000, and it is worth $600,000 on the day they pass away, your new cost basis is $600,000. If you sell the house three months later for $610,000, your capital gain is only $10,000. Furthermore, because inherited assets are automatically considered long-term holdings regardless of how long you actually owned them, that $10,000 gain will be taxed at the preferential long-term capital gains rates.

Question 10

Are mutual fund capital gains distributions taxable even if I didn't sell any shares?

Accepted Answer

Yes, they are, and this frequently catches novice investors off guard. Mutual funds are required by law to pass their internal net realized capital gains onto their shareholders at the end of the year. If the fund manager sold stocks at a profit within the fund's portfolio, you will receive a 1099-DIV form reporting your share of those capital gains, and you must pay taxes on them for that tax year. This occurs even if you did not sell a single share of the mutual fund itself, and even if the overall value of the mutual fund actually went down during the year. Exchange-Traded Funds (ETFs) are structured differently and generally avoid these surprise internal distributions, making them far more tax-efficient for taxable accounts.

Capital Gains Tax Calculator (2024)

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