Understanding the Capital Gains Tax Laws

Whether you are a Wall Street rookie or an experienced investor, capital gains and losses can be tough to understand. However, with a basic knowledge of capital gains tax laws, and the right tools, it isn't too hard to figure out how to proceed at tax time.


This section consist of:


  • This page which explains what capital gains and losses are, and highlights the benefits of using TurboTax to report them.

  • Capital gains tax rates, which briefly outlines the different rates at which gains are taxed.

  • The tax basis guide looks at how different property is sold, and how each sale method affects the charged tax.

  • The guide to Schedule D describes how to complete the tax form on which capital gains are reported.

The basics of capital gains tax laws

A capital gain is the profit you make from the sale of an investment or an asset. A capital loss is the amount you lose during the sale of an investment or an asset.

You need to report capital gain or loss if you sold stock, mutual funds, real estate, or collectibles or if you redeemed any retirement bonds or notes in the past year.

Other, less common sales that require the filing of Schedule D, include:

  • loss carryovers
  • profits from installment sales
  • home sales
  • like-in-kind sales
  • exchanges
  • commodity straddles
  • estates
  • trusts, and
  • any revenue made or lost from investments in S Corporations.
  • undistributed capital gains.

Note: undistributed capital gains are reported to you on Form 2439, Notice to Shareholders of Undistributed Capital Gains. You report the long-term gain on your Schedule D, and enter the tax paid by the investment company, which is also reported to you on Form 2439, directly onto your 1040 line 68.


For each individual sale, you are responsible for calculating its capital gain or loss, entering it on your Schedule D, and then using these figures to determine your net capital gain or loss for the entire year.

Skip all the hassle - file electronically!

TurboTax Premium allows you to put away all forms, schedules and worksheets, and instead answer plain-English questions in a simple online questionnaire.

If you are an investor, the applicable capital gains tax laws are explained to you, and all the all the calculations and forms (Schedule D) are filled out automatically. Plus, you get the benefit of knowing that all possible credits and deductions are accounted for.

Best of all, you can work on your return for free, and pay nothing until you file.

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Here is a list of some of the specific benefits that TurboTax Premium offers to investors:

  • More Accurate Reporting through stock, bond and mutual fund guidance.
  • Advice for Tricky Issues including capital gains tax laws, municipal bonds, ESOPs, FIFO reporting and more.
  • Security Sales Reporter helps you with entering data for sales prices, wash sales and taxes withheld.
  • Long Term Sales Calculator shows savings from holding shares over 12 months.
  • Cost/Basis Calculator determines the basis for your trades.
  • Added Help With Stock Options including NQSOs, ISO and ESPPs.
  • Help with Tax-Free Investments by comparing the difference between taxable and tax-free bonds.
  • Security Sales Analyzer shows how your capital gains and losses are taxed.


Plus EVERYTHING in the Standard edition:

  • Step by step interview that walks you through your return
  • Automatically fills out form 1040 and all schedules for you
  • Get your investment, mortgage, and wage data instantly
  • Get the deductions you deserve
  • Takes advantage of new tax laws
  • Automatically double-checks for overlooked deductions and missed opportunities
  • File your state return too!


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Next: how different capital gains tax rates are assessed.

Related IRS publications

You can get more information about capital gains tax laws directly from the IRS, in the form of IRS Publication 550.

If you file a paper return, you will also have to fill out Schedule D and possibly Schedule D-1. If you file electronically, all this will be taken care of for you electronically.

Note: you will need an Adobe Acrobat Reader to view these publications, which you can get here. (But you probably already have it.)