This schedule is used to report gains and losses from the sale or exchange of capital assets. Capital assets include things like stocks, bonds, and real estate.
If you sell a capital asset and make money because the selling price is higher than what you paid for it, you have a capital gain. If you sell a capital asset and lose money (the selling price is lower than what you paid for it), you have a capital loss.
- Part I - Short-term capital gains and losses: Lists capital assets that you held for one year or less. This might include stocks or bonds you bought and sold within a single year. Short-term capital gains are taxed as ordinary income, so the rate can be quite high depending on your income.
- Part II - Long-term capital gains and losses: Lists capital assets that you held for more than one year before selling. Long-term capital gains are usually taxed at a lower rate than short-term gains.
- Part III - Summary: Combines your short-term and long-term gains and losses to calculate your net gain or loss. If you have a net capital loss, you can use it to offset other income you earned during the year, up to a certain limit.
Once you've completed Schedule D, you transfer the net result to your Form 1040, which can either increase your taxable income (if you had a net gain) or decrease it (if you had a net loss).