Taxes: Capital Gains & Losses

Question 1

Taxes
Capital Gains and Losses
Eligibility

Answer 1

Eligibility
- only on a sale or distribution of capital assets
Capital Assets
- all assets except inventory, AR, depreciable assets and realty used in a small business, creative works, or other miscellaneous assets
- includes investment and personal use assets

Question 2

Taxes
Capital Gains and Losses
Duration

Answer 2

Long Term vs. Short Term

• Long Term: held over 1 year
• holding period begins and ends day title passes
• if basis of new is determined by the basis of the old asset then tack on holding period of old (involuntary conversion)
• automatic holding for business bad debts (short term) and inheritance (long term)
• ST Capital Gain Distributions from Mutual Fund are reported and taxed as ordinary income

Question 3

Taxes
Capital Gains and Losses
Individuals
Netting Process

Answer 3

1. Net all ST Capital Gains and Losses and net all LT Capital Gains and Losses
   Individuals
   - if combination of net short term and long term capital gains is negative, deduct up to $3,000
   - For AGI & limited to taxable income
   - carried forward indefinitely
   - dies with unused capital losses? use in year of death
   - the carryforward retains character as to ST or LT
   - ST Capital Gains are taxed as ordinary income
   - “Net Capital Gain” = LT > ST and is eligible for a reduced tax rate

Question 4

Taxes
Capital Gains and Losses
Individuals
Individuals - Preferential Tax Rates

Answer 4

Individuals - Preferential Tax Rates
- if “net capital gain” (LT capital gain): then lower rate
- compute tax on regular income and add (net capital gain x lower rate)
- depends on composition of net capital gain
Rate
- regular rate 15% or lower, NCG rate 15%
- regular rate 39.6%, max rate is 20%
- everyone else 15%
3.8% Net Investment Income Tax
- applies to taxpayers whose modified AGI exceeds $250,000 for married filing jointly and $200,000 single
- applied to the lesser of net investment income or excess of AGI over AGI thresholds

Question 5

Taxes
Capital Gains and Losses
Individuals
Net Investment Income
Other

Answer 5

Net Investment Income includes:
- Interest, dividends, annuities, and royalties
- Other passive income
- Gain from sale of assets generating income
Net capital gain on real estate income
- depreciation limited to straight-line
- max rate of 25%
Net capital gain from collectibles
- max rate of 28%

Question 6

Taxes
Capital Gains and Losses
Individuals
Order of Netting

Answer 6

Order of Netting

1. capital gains of 28%
2. capital gains of 25%
3. capital gains of 20/15%

Question 7

Taxes
Capital Gains and Losses
Individuals
Qualifying Small Business Stock

Answer 7

Qualifying Small Business Stock

• small business (less than $50M capital)
• held for more than 5 years
• max gain: lower or greater of 10 times basis or $10M total

Question 8

Taxes
Capital Gains and Losses
Individuals
Section 1244 Stock

Answer 8

Section 1244 Stock Definition
- stock of domestic small business
- capital reciepts no greater than $1,000,000
- 50% reciepts generated from sources other than investment income for past 5 years
- seller has to be original holder
Section 1244 Stock
- gains on sales of 1244 stock treated as regular LT capital gains
- losses on sales of 1244 stock treated as ordinary losses (max $100,000 MFJ and $50,000 others)

Question 9

Taxes
Capital Gains and Losses
Corporations

Answer 9

Corporations

• can only use “net capital loss” (LT capital loss) to offset capital gain net income
• carried back 3 and forward 5 years
• all capital gains ST & LT taxed at regular rates

Question 10

Taxes
Capital Gains and Losses
Sales of Capital Assets

Answer 10

Sales of Capital Assets

• reported on form 1099-B
• date of sale and acquisition, sales price, basis, and tax withheld
• sale of real estate on form 1099-S