Nearly everything you own is a capital asset for tax purposes. Whether you purchased it for personal use or as an investment, the difference between what you paid for it and what you sold it for is a capital gain (or loss). All capital gains are reportable and subject to tax. Unfortunately, capital losses can only be reported on property you purchased for investment purposes.
Capital gains are classified as long-term when the asset is held for more than one year. Long-term gains realized on most assets are taxed at a maximum rate of 15%. The exception is a long-term gain realized on collectibles. Short-term gains (assets held less than one year) are taxed as ordinary income and tax rates could be as high as 35%.
Realized gains and losses offset each other each year, and the net capital gain is reported on your tax return. When capital losses exceed capital gains, you can deduct a maximum of $3,000 against other types of income. Losses greater than $3,000 can be carried into the next tax year and treated as if they were incurred that year. Carry-forward losses offset realized gains earned during the year, with net losses capped at $3,000, and any loss balance carried forward to the following year.
Carry-forward losses never expire. They will continue until used by the owner or until the owner’s death. From the perspective of the IRS, capital losses belong to the person who incurred them. If the loss is incurred on an asset titled jointly, the survivor may carry forward only half of the couple’s losses from any joint property.
Capital losses are locked in when the loss is taken, so transferring remaining assets to joint names will not preserve the loss carry-forward. However, a decedent’s appreciated assets receive a step-up in basis to the value at death which wipes out any unrealized capital gains. This negates the need to preserve the loss carry-forwards. The survivor could sell the assets without incurring a capital gain.