Investing in the stock market is one of the most common strategies individuals rely on to grow their wealth and bolster their retirement savings. However, when tax filing season rolls around, they have to take their capital gains and losses into account to complete their returns accurately.

Capital gains and losses can be confusing for new investors at first, but understanding the basics of how they affect an individual's taxes can be a good foundation to set. First, almost anything a person owns and uses for personal and investment purposes is considered a capital asset. This includes stocks and bonds, mutual funds, real estate, collectibles and fine art, precious metals and even coins. A capital gain is defined as the difference between the amount an individual paid for the investment and the amount they received when they sold it. A profit from the sale results in a capital gain. Meanwhile, losing money during a sale is defined as a capital loss.

Individuals must pay taxes on capital gains. However, they are also permitted to deduct their capital losses. For these reasons, it's important to keep accurate records of all investments made over the course of the year. This not only includes what an individual purchased and the amount invested, but also any fees and commissions attached to both the purchase and the sale.

It's also important that investors separate their long-term capital gains and losses from their short-term capital gains and losses, as these will each receive different tax treatment. Long-term assets are those investments that were held in ownership for more than one year, while short-term investments are those held for one year or less. Long-term assets are taxed at a lower rate than short-term investments, which are taxed at ordinary income tax rates. This means that the rate for short-term gains may reach as high as 35 percent. Long-term capital gains rates typically don't exceed 15 percent and may be lower for individuals in lower-income brackets.

Individuals whose capital losses exceed their capital gains may deduct as much as $3,000 during filing season, or $1,500 if married and filing separately.

Capital gains and losses can be tricky to decipher for new investors or those who experienced a significant amount of activity during the year. For this reason, investors can make filing easier by maintaining their records and setting an appointment with a tax preparer early in the year.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.

About Liberty Tax Service® 
Liberty Tax Service® is the fastest -growing retail tax preparation company in the industry’s history. Founded in 1997 by CEO John T. Hewitt, a pioneer in the tax industry, Liberty Tax Service® has prepared over 8,000,000 individual income tax returns. With 42 years of tax industry experience, Hewitt stands as the most experienced CEO in the tax preparation business, having also founded Jackson Hewitt Tax Service.   

Liberty Tax Service® is the only tax franchise on the Forbes “Top 20 Franchises to Start,” and ranks #1 of the tax franchises on the Entrepreneur “Franchise 500.” Each office provides computerized income tax preparation, electronic filing, and online filing through eSmart Tax.