Unit 7 - Capital Gains & Losses

Question 1

Capital assets

Answer 1

Personal or investment items are often considered capital assets

Any net gains from their sale, maybe subject to more favorable tax rates for capital gains

Question 2

Examples of common individual owned capital assets

Answer 2

Primary residence or vacation home
Furniture
Vehicles
Boats
Antiques and collectibles
Stock
Bond
Mutual funds, excluding those held by professional securities dealers
Cryptocurrency
Virtual currency

Question 3

Taxation of losses and gains of personal use assets

Answer 3

Losses from the sale of personal use property are not deductible

Gains from the sale of personal use assets are usually taxable, subject to certain exclusions

Question 4

Antiques and collectibles tax rate

Answer 4

The tax rate on long-term capital gains on antiques and collectibles is taxed at the individuals ordinary tax rate

But a maximum of 28%

Question 5

How are the assets gains and losses reported?

Answer 5

Schedule D, capital gains and losses

And

Form 8949, sales and other dispositions of capital assets

Question 6

Schedule D

Answer 6

Used to report gain or loss on the sale of investment property and most capital gain or loss transactions

Question 7

Form 8949

Answer 7

Reports specific details about each sale. The taxpayer makes during the year.

Used to report the following :

The sale or exchange of capital assets

Gains from involuntary conversions – other than from casualty or theft

Non-business bad debts

Worthless securities

The election to defer capital gain invested in a qualified opportunity fund (QOF) and the disposition of interest in QOFs

Question 8

Form 8949–2 parts

Answer 8

The first part is for short term assets

The second part is for long-term assets

The form must be filed along with schedule D which contains the summary of all capital gains and losses

Question 9

1099-S

Answer 9

Proceeds from real estate transactions

Report the sale or exchange of real estate

Question 10

Short term capital gain tax rate

Answer 10

Short term, capital gains are taxed at the ordinary income tax rates

Question 11

Long-term capital gains tax rate

Answer 11

Long-term capital gains have the same rates as qualified dividends

0%, 15%, and 20%

Depending on the person’s filing status and income

Question 12

When do you not file a form 8949 with schedule D?

Answer 12

Certain sales and dispositions can be reported if the taxpayer received a form 1099B that…

Reports the basis to the IRS

Does not include any nondeductible wash sale losses

Also, no adjustments need to be made to the basis or type of gain or loss reported, or their overall gain or loss

Question 13

Non-capital assets

Answer 13

Assets held for business use

Or created by a taxpayer for purposes of earning revenue - copyright or inventory

Question 14

Examples of non-capital assets

Answer 14

Inventory or any similar property held for sale to customers

Depreciable property used in a business, even if it is fully depreciated

Real property used in a trade or business, such as a commercial building or a rental

Self produced copyright transcripts, manuscripts, photographs, or artistic compositions

Accounts receivable or receivable acquired by a business

Stocks and bonds held by stock, brokers and professional securities dealers

Business supplies

Commodities and derivative financial instruments

Question 15

Reporting the gains and losses from the sale of business assets

Answer 15

Reported on form 4797 – sales of business property

The amounts flow through to form 1040, schedule D, capital gains and losses

Except for the sale of inventory is reported as ordinary income on schedule, C or schedule F

Question 16

What is the holding period for non-taxable stock dividend or stock splits?

Answer 16

Stock shares acquired because of a non-taxable stock dividend or stock split have the same holding period as the original shares owned

Question 17

Can a taxpayer deduct capital losses

Answer 17

A taxpayer can deduct up to $3000 (1500 for MFS) of net losses against ordinary income in a tax year

Capital losses are netted against any capital gains that may be generated in the same year

Unused losses above limit are carried over to subsequent years and retain their character has either long-term or short term and are reported on schedule D

Question 18

Carryover losses

Answer 18

Are combined with gains and losses that occur in the next year

Taxpayer first nets, short term, capital gains, and losses, including carryover losses against each other

Then long-term capital gains and losses, including carryover losses against each other

The results are then netted against each other, if applicable

Question 19

How long can capital losses be carried over

Answer 19

Indefinitely during the taxpayers life

But cannot be carried over to a beneficiary

Question 20

NFTs

Answer 20

Nonfungible tokens

Question 21

Digital assets are treated as…

Answer 21

Property and their sale or disposition generally results in capital gain or loss

Exchanging one digital assets for another is also treated as a disposition and is a fully taxable event

Question 22

Married taxpayers disadvantage for capital losses

Answer 22

Deduction limit is $3000 for unmarried taxpayers and also for married filing jointly

Married filing separately, Files only get $1500 loss limit

Question 23

How are capital losses calculated against ordinary income

Answer 23

The $3000 or $1500 limit reduces the taxpayers ordinary income by $3000 or $1500

Question 24

Wash sales

Answer 24

A wash sale occurs when an investor sells a security to claim a loss

Only to rep purchase it again very soon there after

It is considered to have occurred when a taxpayer sells security at a loss and within 30 days :

Buys the identical security

Acquires a substantially identical, security and a taxable trade

Or acquires a contract or option to buy the identical security

If this happens, a taxpayer cannot deduct a loss on the sale of an investment

Must add the disallow loss to the basis of the new stock or securities

Resulting in an increase in the taxpayers basis in the new stock or securities

Question 25

Wash sales – are applied to

Answer 25

Only stocks and securities

Question 26

Wash sales – when only repurchasing a percentage of shares

Answer 26

Only the purchase percentage is disallow, but the remaining loss may be recognized

Question 27

Wash sale rules do not apply to

Answer 27

Professional securities, dealers or stockbrokers

Preferred stock of a corporation is not considered identical to the common stock of the same corporation

Question 28

Determining the basis and the gain or loss on a home sale you need…

Answer 28

Need the following

Selling price

Amount realized

Basis

Adjusted basis

Question 29

Calculating the” amount realized” when selling a home

Answer 29

Calculated by subtracting selling expenses from the sales price

Includes realtors commissions, advertising fees, legal fees, and loan charges paid by the seller, such as points

Question 30

Basis in a home

Answer 30

Depends on how the home is acquired

Home purchased equals cost of the home

Constructed equals building expenses, plus the cost of the land

Inherited equals FMV at owners death

Gifted equals donors adjusted basis

Question 31

Calculating the” adjusted basis” for a home

Answer 31

Equals the taxpayers basis in the home increased or decreased by certain amounts

Increases include additions or improvements to the home that have a useful life of more than one year

Repairs that maintain a home in good condition are not considered improvements

Decreases to basis include deductible, casualty, losses, credits, and product rebates

Question 32

Home sale gain or loss

Answer 32

Losses on a whale are always a nondeductible loss

Most gains are taxable, but not always taxable

Short term gain if one year or less

Long-term gain, if more than one year

Question 33

Related party transaction rules

Answer 33

Special regulations are in place for transactions between related parties

A loss on the sale of property between related parties is not deductible

When later sold by the related party …

And additional loss is only recognized from that person’s basis does not include the disallow loss

A gain is recognized by the related party only to the extent it is more than the disallow loss to the original party seller

When multiple pieces of property are sold – the losses cannot be used to offset the gains

Question 34

More than 50% control rule

Answer 34

If a taxpayer has major control, more than 50%, of a corporation partnership or other business entity…

Any property transactions between the taxpayer and the business are subject to related party. Transaction rules.

If property is sold or traded at a loss, the loss cannot be deducted if the transaction involves any of the following related parties

Immediate family members and descendants (spouse, siblings, parents, grandparents, grandchildren) - does not include uncles aunts, nephews nieces, cousins, stepchildren, step parents, in-laws, and ex spouses

Partnership, corporation, or other business entity that is controlled by the taxpayer or a family member

A tax exempt organization that is controlled by the taxpayer or a family member

Closely related business entities controlled by the same owners

Question 35

Gross profit percentage – how to calculate

Answer 35

The gross profit number divided by the full price received

Question 36

Installment sales

Answer 36

A type of financing arrangement when selling a business real estate, a small business, and the sale of intangibles

Installment sales are reported on form 6252, installment sale income

The installment sale method is the default method – can defer tax by only reporting a portion of the gain as each installment is received

Each payment received on an installment sale typically consist of

Interest income
Return of the adjusted basis in the property
Gain on the sale – determined by applying the gross profit percentage to the amount of the payment received minus the interest portion

If a seller elect out of the installment method, the seller must report all the gain in the year of the sale

Question 37

The installment method cannot be used for

Answer 37

Publicly traded securities, such as stocks and bonds that are traded on an established securities market

Stock in a private company, such as a small corporation that is being sold to a private buyer can qualify for the installment method

Question 38

Installment sale – related persons – holding period

Answer 38

The installment sale method is disallow, and the full gain will be recognized on a return if the related party sells the asset during the two-year holding period

Question 39

What does it mean to abandon a worthless security?

Answer 39

A taxpayer must permanently surrender all rights to it and receive no consideration in exchange

Question 40

A loss from worthless securities

Answer 40

The taxpayer may choose to abandon a security that has lost its entire value in order to take advantage of the loss for tax purposes

Stocks, stock rates, and bonds that become worthless during the tax year are treated as though they were sold for zero dollars on the last day of the tax year

Allowed to amend a tax return for up to seven years in order to claim a loss from worthless securities

Taxpayers should report worthless securities on form 8949 and indicate as a worthless security deduction by writing worthless in the applicable column of form 8949

Question 41

What is section 2244

Answer 41

Section 1244 stock is a special type of investment that is subject to beneficial tax treatment

Section 1244 stock means stock in a domestic corporation if :

1. At the time such stock is issued, such corporation was a small business corporation.
2. Such stock was issued by the corporation for money or other property, and
3. the corporation, during the five-year period proceeding the law year, derived more than 50% of its aggregate, gross receipts from sources, other than royalties, rents, dividends, interest, annuities, and sales or exchanges of stocks or securities

Question 42

A corporation is a “ small business corporation” only for purposes of section 1244 stock if…

Answer 42

The amount of money and property received by the corporation for the stock it issued does not exceed $1 million

Question 43

Section 1244 small business stock – special tax treatment

Answer 43

If a taxpayer stock qualifies as section 1244 stock and sells that stock for a loss up to $50,000 or $100,000 if MFJ

May be treated as an ordinary loss instead of a capital loss

The loss is not subject to the $3000 loss limitation that normally applies

Only applies to the original shareholder of the stock