Tax Reporting: Capital Gains and Losses

Assets held for investment purposes, including as stocks, options and bonds, are classified by the IRS as capital assets. When such assets are sold, a capital gain or loss is realized on the sale. If the capital asset is sold for a price greater than its purchase price, then a capital gain has been realized; if less, then a capital loss has been realized. In determining whether a capital gain or loss has been realized, adjustments to the purchase and sales price may be allowed to recognize certain transaction costs such as commissions and other specific adjustments.

Proper determination and recognition of capital gain and loss is important as capital gains may be subject to lower tax rates than other forms of income. Net capital losses are subject to annual limits. The taxation of capital gains and losses are also distinguished by the length of time the asset was held prior to sale.

IRS Publication 550, "Investment Income and Expenses" is a good source of information on this topic. It is available free on line at We also recommend you consult your tax professional.

In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.