Capital gains and losses: netting and rates
A capital gain or loss is the difference between what a taxpayer receives for a capital asset and the asset’s adjusted basis. The decision rule for exam questions: sort every sale into short-term (held one year or less) or long-term (held more than one year), net within each bucket, net the two results against each other, and only then apply the rate or the loss limit. This guide uses tax year 2025 and the IRS sources Publication 550 (2025) and the 2025 Instructions for Schedule D. It is exam preparation, not tax advice.
The five-step flow, with numbers
Schedule D works in a fixed order, and so should an answer.
- Classify each sale by holding period. Short-term is one year or less, long-term is more than one year. Publication 550 reports short-term sales in Part I and long-term sales in Part II of Form 8949.
- Net within each bucket. Short-term gains minus short-term losses gives the net short-term result, long-term gains minus long-term losses gives the net long-term result. Capital loss carryovers from earlier years join the bucket they came from.
- Combine the two net results. Publication 550 says to combine the net short-term result with the net long-term result to get the total net gain or loss.
- If the total is a gain, the part that is net long-term gain in excess of net short-term loss is the net capital gain and gets the lower rates. Any net short-term gain stays in ordinary income.
- If the total is a loss, deduct the lesser of the loss or $3,000 ($1,500 if married filing separately) against other income, and carry the rest forward.
Worked example. In 2025 a single taxpayer sells stock A for a $4,000 gain after 5 months, stock B for a $1,500 loss after 8 months, stock C for a $6,000 gain after 3 years and stock D for a $9,000 loss after 2 years.
- Net short-term: $4,000 - $1,500 = $2,500 gain.
- Net long-term: $6,000 - $9,000 = $3,000 loss.
- Combined: $2,500 - $3,000 = a $500 net loss, which is deductible in full because it is under $3,000. No carryover remains.
Change the facts: with a $2,000 short-term loss and an $8,000 long-term loss and no gains, the total loss is $10,000. The deduction is $3,000, and the carryover is $7,000. Publication 550 says to use short-term losses first when working out the carryover, so the $3,000 uses the $2,000 short-term loss and $1,000 of the long-term loss, leaving $7,000 of long-term loss. A carried-over loss keeps its short-term or long-term character.
What changes the holding period or basis
Several rules shift the answer without changing the arithmetic.
- Inherited property is treated as long-term whatever the actual holding time (Publication 550), and its basis is generally fair market value at the date of death. See tax basis for the full basis rules.
- Gifted property carries the donor’s basis. If the gift’s fair market value was lower than the donor’s basis, Publication 550 gives two bases: the donor’s basis for figuring a gain, and fair market value at the gift date for figuring a loss. A sale between the two figures produces neither gain nor loss.
- Wash sales. A loss on stock or securities is disallowed if the taxpayer buys substantially identical stock within 30 days before or after the sale (including a purchase inside an IRA). The disallowed loss is added to the basis of the new shares, and their holding period includes the old shares’ period.
- Related-party sales. A loss on a sale to a family member or to a corporation the taxpayer controls is not deductible (Schedule D instructions).
- Mutual fund capital gain distributions are long-term whatever the holding period of the fund shares, while distributions of net short-term gain are ordinary dividends (Publication 550 and the Schedule D instructions).
The 2025 rate table
Publication 550 (Table 4-4) gives the maximum rate by type of gain. The thresholds below are taxable-income figures for 2025.
| Gain type | Maximum rate |
|---|---|
| Collectibles gain, and eligible qualified small business stock gain after the section 1202 exclusion | 28% |
| Unrecaptured section 1250 gain | 25% |
| Other long-term gain, in the 10% or 12% ordinary bracket | 0% |
| Other long-term gain, ordinary rate 22% to 35% | 15% |
| Other long-term gain, ordinary rate 37% | 20% |
The 0% rate applies up to $48,350 (single or married filing separately), $64,750 (head of household) or $96,700 (joint). The 15% rate applies up to $533,400 (single), $566,700 (head of household), $300,000 (married filing separately) or $600,050 (joint). The regular tax computation applies if it gives a lower tax than the maximum rate.
Gains are stacked on top of ordinary taxable income. A single filer with $50,000 of taxable income, of which $10,000 is long-term gain, has $40,000 of ordinary income. The gain fills the room up to $48,350 first, so $8,350 is taxed at 0% and the other $1,650 at 15%, which is $247.50 of tax on the gain. High earners can also owe the 3.8% net investment income tax, whose thresholds appear in Publication 550 ($200,000 single or head of household, $250,000 joint, $125,000 separate).
Which exams test this
| Exam | How the topic appears | Where on this site |
|---|---|---|
| SEE Part 1 | Domain 2, Income and Assets (17 scored questions), property section: capital gains and losses, including netting, short-term and long-term treatment, mark-to-market and virtual currency, plus basis of assets and wash-sale style fact patterns | Income and assets explained |
| SEE Part 1 | Domain 5, Advising the Individual Taxpayer (11): property sales, character of transactions (capital gain rates against ordinary rates) and carryovers shown on Schedule D | Advising individuals explained |
The Part 2 and Part 3 outlines list no capital gain objective in their own right. The outline for SEE Part 1 notes that PSI says not every topic appears on a given paper and the list is not all-inclusive.
How exam questions are built
Questions test sorting and order, not hard arithmetic. Watch for these:
- “More than one year.” A sale after exactly one year is still short-term. Look for a purchase and sale date on the same day of the month a year apart.
- Netting order. A short-term loss can wipe out a long-term gain. Two answer options usually differ only in the character (short-term or long-term) of the net result.
- The $3,000 limit. The limit applies to the net loss after offsetting all gains, not to each loss, and it is $1,500 for married filing separately.
- Inheritance and gifts. “Inherited” means long-term automatically. A gift with a lower fair market value means two bases.
- Wash sale. The loss is postponed into basis, not lost.
Related topics are filing status, since the loss limit and rate thresholds depend on it, and depreciation and MACRS for gain on business property, which is handled differently.
Practice questions
Question 1. In 2025 a single taxpayer has these results and no carryovers: a $7,000 long-term capital gain, a $2,000 long-term capital loss, a $3,500 short-term capital loss and a $500 short-term gain. What is the net result?
- A. $4,500 net short-term gain
- B. $5,000 net long-term gain
- C. $2,000 net long-term gain
- D. $3,000 net short-term loss
Show answer
Answer: C
Net long-term is $7,000 - $2,000 = $5,000 gain. Net short-term is $500 - $3,500 = $3,000 loss. Combining them gives a $2,000 net gain, and because the long-term gain exceeds the short-term loss, the $2,000 is a net long-term capital gain eligible for the lower rates. Adding only the gains, or ignoring the short-term loss, gives the wrong totals, and the result is a gain so the $3,000 loss limit does not apply.
Question 2. In 2025 a married couple filing jointly has a net long-term capital loss of $11,000 and no other capital transactions. How much can they deduct against other income for 2025, and what is carried forward?
- A. Deduct $11,000, carry forward nothing
- B. Deduct $3,000, carry forward $8,000
- C. Deduct $1,500, carry forward $9,500
- D. Deduct $3,000, carry forward nothing
Show answer
Answer: B
The yearly limit on the net capital loss deduction is $3,000 for a joint return ($1,500 only applies if married filing separately). The remaining $8,000 ($11,000 - $3,000) carries forward and keeps its long-term character. Deducting the whole $11,000 ignores the limit, the $1,500 figure applies to separate returns, and the loss is not lost entirely because the unused part carries over.