Netting Short-Term and Long-Term Gains and Losses

We're into the final stretch of the Schedule D, the part where you actually compute your capital gains and losses.

In Part I of Schedule D, you'll net your short-term gains and losses from sales of investment assets, as well as any from bad debts, casualty losses, installment sales, and like-kind exchanges; and from partnerships, S corporations, or estates and trusts as reported on Schedule K-1. You'll also net any carryovers of short-term losses from previous years. By "netting" we mean that your total short-term losses are subtracted from your total short-term gains, and the result will be a net short-term gain or loss.

Then, in Part II of Schedule D, you go through the same process with your long-term gains and losses. The result will be a net long-term gain or loss. Remember, any long-term gains or losses from art, jewelry, antiques, precious metals, etc., which are termed "collectibles," are taxed at a 28 percent rate. You will need to complete the 28% Rate Gain Worksheet in the Schedule D Instructions.

Then, you take your short-term gain or loss and net it against your long-term gain or loss.

Gains. If the result is a gain, it must be reported on Line 13 of the 1040 Form. Then, go on to complete the rest of your 1040 Form. After you complete the rest of your income, adjustments, and deductions, and you're ready to figure out the actual amount of tax you owe, you must come back to Part III of the Schedule D to compute your taxes using the special lower rates for various types of capital gains.

Part III of Schedule D looks much more daunting than it actually is. You must follow the directions for each line, to the letter, but if you do that you'll effectively separate out any gains on collectibles and eligible small business stock, or on unrecaptured real estate depreciation, and tax them at 28 percent and 25 percent, respectively. The computations will also help you find out whether you're in the 10 or 15 percent bracket: If you are, your long-term capital gains are taxed at zero percent.

A note on Line 19 asks for your unrecaptured section 1250 gain, if any. This refers to depreciation you claimed over the years on business or investment real estate you sold. If you invested in any REITs or mutual funds that invest directly in real estate, the amounts you need will be shown in Box 2b of Form 1099-DIV. If you sold any business or commercial real estate last year, you'll need to use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D Instructions to complete this item. You can get a copy by calling 1-800-TAX-FORM or going to www.irs.gov.

Losses. If you subtract your losses from your gains and the net result is a loss, you can claim a capital loss on your tax return.

However, if your capital loss for 2014 is more than $3,000 (more than $1,500 for marrieds filing separately), you may not be able to deduct the entire loss. In most cases, any amount above $3,000 will have to be carried over to later years, and deducted at the rate of $3,000 per year, including losses in future years, until the entire loss is used up. When you carry over a loss, it retains its character as short-term or long-term, and will be netted into next year's computations. The worksheet included below will help you to calculate your carryover amounts.

Planning Tools You can use this capital loss carryover worksheet to figure out the amount of losses that you can carry over to later tax years. When you complete the worksheet, be sure to keep a copy in your records so that you remember to deduct the carryover loss next year, and so that you have proof of the amounts in case you are audited.

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