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The capital gains tax rules apply to net capital gains or losses. Capital gains and losses for any taxable year must first be netted, or calculated, so that the losses are subtracted from the gains. First the net of short-term gains and losses are calculated; next the net of long-term gains and losses are calculated against each other. The net short-term gain or loss and the net long-term gain or loss are calculated against each other for the net. This number is relevant to the tax year.

Taxpayers report capital gains and losses on Schedule D of Form 1040. If a taxpayer has a “net capital gain,” that gain may be taxed at a lower tax rate. Net capital gain is the amount that results when net long-term capital gain for the year is more than net short-term capital loss. If capital losses exceed capital gains from the sale of capital assets, the amount of the losses that exceed the gains that may be claimed is limited to $3,000, or $1,500 if the taxpayer is married filing separately. If net capital loss is greater than this limit, the taxpayer can carry the loss forward to subsequent tax years.

Each gain or loss is calculated first by subtracting the purchase price of the asset from the sales proceeds. Then these figures are combined to come up with a net short-term gain or loss figure. Next, the same procedure is done with long-term assets. The result is either a net long-term loss or a net long-term gain. Next, the short- and long-term figures are netted to come up with a final tally.

Inside Netting