Gains and Losses Flashcards
When a taxpayer disposes of property, the gain/loss recognized is classified as _____ or _____. The character of the gain/loss is determined by the _____ of the asset disposed
capital or ordinary
nature
*a capital asset will qualify as 1231 if it is used for business purposes and held for more than a year
Capital assets include _____ and _____ property held by the taxpayer
real and personal
Capital assets are defined as all property held by the taxpayer except:
Inventory held for sale in the ordinary course of business
Depreciable property and real estate used in business
Accounts/notes receivable arising from sales/services in the taxpayer’s business
Copyrights, literary, musical, or artistic compositions held by the original artist (exception: sale of musical composition held by the original artist receive capital gains treatment)
Treasury stock (not an ordinary asset and not subject to capital gains treatment)
Basic formula for calculating gain/loss
Amount realized - adjusted basis of asset sold = gain or loss
Amount realized includes: cash received, debt relief, FMV of property received, FMV of services received…all reduced by selling expenses
How much can a taxpayer recognize if they have a net long/short term capital loss in a given tax year?
a max of $3,000 of the realized loss can be recognized against gross income (ordinary, passive, portfolio); it can be carried forward indefinitely and maintains its character as long/short term in future years
if there are both net long and net short term losses, the net short term are deducted first
A personal bad debt loss is treated as a _____ in the year the debt becomes totally worthless
short-term capital loss
The cost of worthless stock/securities is treated as a _____ as if they were sold on the last day of the taxable year in which they became totally worthless
capital loss
A short sale of stock results in a _____ or _____. The holding period is based on the date the short sale is _____, not the _____ of the short sale when the stock is delivered
capital gain/loss
executed
closing date
How are capital gains/losses for a corporation treated differently from individuals?
Net capital gains are added to ordinary income and taxed at regular rates. There is no distinction between short/long term gains/losses for corporations (net 1231 gains are entitled to capital gains treatment)
Net capital losses cannot be deducted from ordinary income. They are carried back 3yrs and forward 5yrs. The losses can offset gains in other years within the carryback/carryforward window
What does Section 1231 assets include?
Section 1245 depreciable personal property, Section 1250 depreciable real property, and land.
To qualify for 1231, it must be used in the business and held for more than a year
Treatment for a net 1231 loss
ordinary loss treatment; the deduction for ordinary losses are not limited (compared to capital losses that are limited to $3k/year for individuals and only allowed to offset capital gains for corporations)
Treatment for a net 1231 gain
capital gain treatment; used to offset capital losses for corporations and are taxed at preferential rates of 0%, 15%, and 20% for individuals (part or all of a net 1231 gain may be treated as ordinary income under the Section 1231 five-year look-back rule)
What is the Section 1231 five-year look-back rule?
When a taxpayer has a net Section 1231 gain, they must look in the previous 5 years to see if there were any 1231 losses that were deducted as ordinary income. If so, they must “pay back” this ordinary treatment by treating the current year 1231 gain as ordinary income to the extent of the previous 1231 losses. You start with the oldest year in the five-year look-back window
What is Section 1245 (personal property)?
depreciable personal property (vehicles, computers, machinery, etc.) used in a business for more than a year
when 1245 assets are sold, the lesser of the gain recognized or accumulated depreciation taken on the asset is recaptured as ordinary income…any remaining income is treated as 1231 gain
What is Section 1250 (real property)?
depreciable real property (warehouse, office building, etc. NOT land) used in a business for more than a year
differs from 1245 in that it recaptures only the portion of depreciation in excess of straight-line (generally applies to assets placed into service pre-1987; current law requires real property to use straight-line, so 1250 no longer applies)
for corporations, Section 291 applies to Section 1250 assets sold at a gain. The amount of recapture as ordinary income is equal to 20% of the lesser of the recognized gain or the accumulated straight-line depreciation taken on the asset (any remaining gain is 1231 gain)
