M-2 - Gains and Losses Flashcards
How do you calculate the gain or loss at disposition?
You take the amount realized - adjusted basis of the asset sold: This gives you your gain or loss.
How do you calculate the amount realized?
Amount realized could be money that you received, cancellation of any debt, FMV property, less any selling expenses (commissions).
What are examples of capital assets?
Investments (stock, bonds, crypto) and personal use items (personal car, home, furniture).
How do you calculate the adjusted basis of an asset?
It could be purchased, gift , or inherited per the last lecture.
What are some examples of non capital assets?
Inventory, AR from the sale of asset or business services, used in taxpayer’s trade or business (real property or personal property). Typically taxed as ordinary income.
What are Qualified Small Business Stock (QSBS)
These are going to be long term gains on the sale of collectables (work of art, stamp or coin collections, etc. )
How are Qualified Small Business Stock taxed upon sale?
There are a few rules to this one, but to qualify as qualified small business stock you have to meet the following rules:
- QSBS is original issue C corporation stock that was held for more than five years.
- The C corporation must have no more than 50 million in assets.
If these are met, then the taxpayer can exclude some of the gain which is:
* The gain excluded is either the greater of 10 million or ten times the taxpayers basis in the stock.
* Anything in excess, is taxed at 28%.
How do net capital loss deductions work for individuals?
For a taxpayers personal return, they are allowed to deduct a maximum of $3,000 per year for short term or long term losses on their personal return, and this can offset any ordinary income, passive income, portfolio income. Any losses can be carryforward indefinitely, but cannot by carryback.
What is a worthless stock and can you get a loss for it?
A stock whose price has gone to zero, and yes you can. The cost you purchased the stock for, can be treated as a capital loss in the year the stock became worthless. This means its value was zero and only zero. Not a penny, zero. So if you bough the stock for 200 and it became worthless the next year. You can deduct a 200 dollar loss the year it became worthless.
What is a short sale and how are the gain or losses treated?
This is when an investor things a stock is overpriced, so sell the stock now and will buy it back later when the price drops to make a profit. This is when you sell a stock now for a higher price, and then you buy it back when the cost becomes cheaper.
The gain or loss on the sale is treated as either a capital gain or a capital loss.
Please explain the capital gain and loss netting process for individuals.
Individuals could have many different gains and losses. The three main ones are short gains and losses, long term gains and losses, and lastly 28% long term gains and losses. They are netted in this order:
*First you take any short term gains and losses and net those with each other, then you take any LT gains and losses and net those with each other, lastly you net the 28% LT gains and losses with each other.
- Once you have these three numbers, you want to offset any ST gains and losses with you 28% LT amounts. Whatever is left, you then want to offset with you LT gains and losses. Whatever is left is what is going to be taxed, and at what rates.
How are capital gains treated in C corporations?
These are the four things with capital gains for C Corps:
- Added to ordinary income and taxed at regular 21% tax rate.
- No distinction between LT and ST for C Corps.
- C Corps do not get capital gain rates, all 21%.
- Corporations may not deduct any net capital losses from ordinary income, just other capital gains.
How are capital losses treated in C corporations?
They can go back three years and forward fiver years, and they can only offset capital gains, not ordinary income.
What does “WRaP” represent and what does it stand for?
WRaP, are nondeductible losses. And the they stand for
W - Wash Sales
R - Related Party transactions
a - and
P - Personal Losses
What is a Wash Sale?
A wash sale is when you purchase sell a stock or bond for a loss, and then purchase it back 30 days before the sale, or 30 days after the sale. If this occurs, a wash sale has occurred, and any losses are not deductible. Just losses not gains.
