Capital Gains/Losses & Employee Stock Options Flashcards
What is the treatment of capital gains/losses?
Net capital losses are deductible up to a maximum of $3,000 per year against non-capital income. Any excess can be carried forward.
Capital gains are fully taxable (but at lower tax rates)
Holding period:
- Short-term - one year or less - Long-term - more than one year
In general, how is the donee’s basis of a gift determine? How is the holding period determined?
In general the donee’s basis of gift is the same as the donor’s basis
If the sale is greater than the donor’s basis, then the gain is the difference between the donor’s basis and sale price.
If the sale is less than the FMV, the loss is the difference between the FMV at the date of the gift and the sale price.
If the sale is at less than basis but greater than FMV, no gain or loss is recognized.
The holding period includes the donor’s holding period unless basis becomes FMV, then holding period starts at date of gift.
In general, how is the basis of inherited property determined? How is the holding period determined?
The basis of inherited property is the LOWER of the:
- FMV at date of death
OR
- FMV at alternate lower valuation date (if elected), which is:
- Six months from date of death
- Disposal date (if disposed of less than six moths from date of death)
The holding period is automatically deemed long-term for all inherited property, regardless of how long the deceased owned the property.
When is a gain NOT taxed?
“HIDE IT”
Homeowner’s Exclusion
Involuntary conversions
Divorced Property Settlement
Exchange of like-kind business/investment assets
Installment Sale
Treasury and capital stock transactions (by Corp.)
- Gains are not taxed when you can HIDE IT!!
Identify the major tax provisions of involuntary conversions of property.
Gain may be deferred if insurance proceeds are reinvested in property that is similar or related in service or use within two years for personal property or three years for business property.
A realized gain exits when insurance proceeds are greater than the adjusted basis in the converted property. Note the difference between realized gain versus recognized gain:
- Gain not recognized if proceeds reinvested in qualified replacement property.
- Basis is cost of replacement property less any gain not recognized.
- Losses recognized and basis is replacement cost.
Holding period includes period that original property was held. (Rolled over Basis)
What is the exclusion amount on the recognition of gain on the sale of personal residence, provided the criteria for exclusion are met?
$250,000 for single taxpayers
$500,000 for married taxpayers
Identify the criteria for the exclusion provision on the sale of personal residence.
Taxpayers must have owned and used the property as the principle residence for two years or more during the five-year period ending on the date of the sale or exchange. Periods of nonqualified use cause a portion of the gain to be taxable.
Either spouse for a joint return must meet the ownership requirement, and both spouses must meet the use requirement with respect to the property.
Taxpayers may be eligible for a partial (on a prorated basis) exclusion if the sale is due to a change in place of employment, health, or unforeseen circumstances, when claimed within the previous two years or fail to meet the ownership and use requirements.
No age requirement
No rollover to another house is required.
Renewable, can be utilized more than one time.
Name the criteria for a classification as a like-kind exchange.
Tangible real or personal property; and
Used in trade or business; or
Held for investment (except inventory, stock, and securities)
In a like-kind exchange, what is the basis of the property received?
The basis of property received retains the basis of given up
Basis of property given up \+ Any Boot Paid - Any Boot Received (at FMV) \+ Any Gain Recognized \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ = Basis of property received
Recognize gain to the extent of the lower of the realized gain or the boot received.
Identify the nondeductible losses
“WRAP”
Wash sale Loss
Related Party transactions
And
Personal Losses
What is the tax treatment given to wash sales?
Losses are disallowed if the same security is bought within 30 days before or after the sale.
The disallowed loss increases the basis in the property (security)
Gains are taxable.
What is the tax treatment for sales to related parties?
No deduction is allowed for losses on sales to related parties.
On a later resale, any gain recognized is reduced (but not below zero) by the previous disallowed loss.
What are the corporate capital gain/loss rules for C Corporations?
Net Capital gains (long-term and short-term)
- Corporate net capital gains are added to ordinary income and taxed at the regular tax rate.
- Section 1231 gains are entitled to capital gain treatment.
Net Capital losses (long-term and short-term)
- Corporate net capital losses are carried back 3 years and forward 5 years as a short-term capital loss.
- They are deducted from capital or Section 1231 gains.
Describe the employee and employer taxation of nonqualified employee stock options.
Employee Taxation
- If there is a readily ascertainable value, the employee recognizes ordinary income in that amount in the year granted.
- If there is no readily ascertainable value, the employee recognizes ordinary income based on the fair value of the stock purchased less any amount paid for the option on the exercise date.
Employer Taxation
- The employer may deduct the value of the stock option as a business expense in the same year the employee recognizes ordinary income.
Describe the employee and employer taxation of incentive stock options (ISOs)
Employee Taxation
- Generally ISOs are not taxed as compensation. Basis of the stock is the exercise price plus any amount paid for the option. Generally, any gain or loss on the subsequent sale is capital.
Employer Taxation
- Generally, employers do not receive a tax deduction for ISOs.
