Understanding Capital Gains and Losses Is Very Important. Two terms that every taxpayer and every investor need to be familiar with as capital gains and capital losses. When it comes to taxes, the rules are fairly straightforward and easy to understand. If you have a capital gain on an investment, you typically will have to pay taxes on that gain. If you lose money on an investment, you may be entitled to write off at least some of that loss.
What Is Capital Gain?
Virtually everything that is owned is a capital asset. Capital can consist of everything from stocks and bonds to mutual funds and the roof over your head. There are special rules for capital gains as they apply to a principal residence, so those considering the sale of a home should be sure to check with their accountant or tax preparer.
Also Read: The Time to Reduce Next Year’s Taxes Is Now
What Is Capital Losses?
When it comes to stocks and other capital assets, the taxpayer is generally required to pay tax on the difference between the selling price and the original purchase price. For instance, if you purchased a block of stock for $5,000 and sold it later for $10,000 you would be required to pay taxes on the resulting $5,000 capital gain. That capital gain would be reported on Schedule D of the 1040 tax return.