8631 / What is the netting process used to determine whether the taxpayer has a capital gain or loss?

(1)  short-term capital assets, with no special tax rate;

(2)  28 percent capital assets, generally consisting of collectibles gain or loss, and IRC Section 1202 gain;

(3)  25 percent capital assets, consisting of assets that generate unrecaptured IRC
Section 1250 gain; and

(4)  all other long-term capital assets, which are taxed according to the taxpayer’s taxable income at 20 percent, 15 percent, or 0 percent.

Within each group, gains and losses must be netted. Generally, if, as a result of this process, there is a net loss from asset-group “(1),” it is applied to reduce any net gain from groups “(2),” “(3),” or “(4),” in that order. If there is a net loss from group “(2),” it is applied to reduce any net gain from groups “(3)” or “(4),” in that order. If there is a net loss from group “(4),” it is applied to reduce any net gain from groups “(2)” or “(3),” in that order.¹

If net capital losses result from the netting process described above, up to $3,000 ($1,500 in the case of married individuals filing separately) of losses can be deducted against ordinary income.² Any losses that are deducted would be treated as reducing net loss from groups “(1),” “(2),” or “(4),” in that order.