Capital Gains and Losses

Question 1

Steps for determining capital gain or loss

Answer 1

1. Is it a capital asset?
2. Has there been a sale or exchange?
3. Was it held long term? (over 1 year)

Then:
- net the longs,
- net the shorts,
- net the nets

Question 2

Tax rates for this class

Answer 2

Ordinary income (and short term capital gains): 30%

Capital gain (long term): 20%

Collectible: 28%

Question 3

Deductibility of capital losses

Answer 3

• Capital losses are deductible up to 3g,
• Any excess carries over to the following year
• Short term losses applied before long term losses

Question 4

What is NOT a capital asset?

Answer 4

(1) inventory
(2) property subject to depreciation (business property)
(3) intangible property created by the taxpayer
(4) receivables

Question 5

If property is NOT a capital asset, when is it nevertheless afforded capital gains treatment?

Answer 5

(1) Primary consideration: purpose of holding the property

(2) Purpose of acquiring the property (not dispositive)

(3) The continuity and frequency of property sales as opposed to “isolated transactions”

Also consider:
(4) Partitioning

(5) Advertising and listing with real estate agents

(6) Makes up a substantial part of the taxpayer’s income, and

(7) prof likes what the taxpayer lists as their occupation on their tax filings

Question 6

What does “primarily” mean?

Answer 6

“primarily” means “of first importance” or “principally.”

Question 7

Two less conventional ways a “sale or exchange” occurs

Answer 7

1. a trustee discharging a claim against a trust by substituting securities for cash
2. When an obligation is retired for consideration (payment of a debt or settlement of a judgment)

argue that settlement of judgement taxed as capital asset

Question 8

Key rules for the holding period

Answer 8

(1) The holding period begins the day following the date of acquisition

(2) If bought on the last day of the month, treat it as if it was bought on the 1st day of the subsequent month (meaning holding period would start on the 2nd)

Question 9

Holding period rules for securities

Answer 9

For securities
(1) Considered acquired or sold on the trade date, regardless of the accounting method

(2) if same stock bought on two separate occasions
- Choose which for holding period
- Otherwise, FIFO

(3) inherited stock, tack holding period

Question 10

For capital assets that are not stock, when can you tack?

Answer 10

the holding period of the previous owner “tacks” to the current holding period if the property has the same basis
- Gifts with carry over basis
- remember dual basis rule

Question 11

B holds a capital asset for 3 years before passing away. A inherits the capital asset from B. A sells the asset immediately. Long term or short term?

Answer 11

Long term.

S 1223(9) - property “acquired from” a decedent and sold within 1 year will be deemed to have been held long-term

Question 12

Business property is not a capital asset, but it can get capital gains treatment under S 1231. How?

Answer 12

Under S 1231, recharacterization, when selling business property:

• If gains exceed losses, such gains and losses are capital gains and losses
• Conversely, gains and losses will be deemed ordinary

Question 13

The capital gains treatment of business property is limited by S 1245.

Answer 13

S 1245, Recapture Upon sale of business property

• The amount of gain is ordinary income to the extent of the lesser of (1) gain or (2) depreciation deductions taken
• This effectively recaptures the depreciation deductions taken on the sold property, limited by the gain from the sale, and avoids the taxpayer receiving a double benefit (S 167 deductions and capital gains treatment under 1231)

Question 14

When does S 1245 Recapture not apply?

Answer 14

when the business property is
(1) A gift, or
(2) transferred upon death