Unit 7 - Capital Gains & Losses Flashcards
Capital assets
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
Examples of common individual owned capital assets
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
How are losses and gains of personal use assets taxed
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
Antiques and collectibles tax rate
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%
How are the assets gains and losses reported?
Schedule D, capital gains and losses
And
Form 8949, sales and other dispositions of capital assets
Schedule D
Used to report gain or loss on the sale of
investment property and
most capital gain or loss transactions
Form 8949
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
Form 8949–2 parts
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
1099-S
Proceeds from real estate transactions
Report the sale or exchange of real estate
Short term capital gain tax rate
Short term, capital gains are taxed at the ordinary income tax rates
Long-term capital gains tax rate
Long-term capital gains have the same rates as qualified dividends
0%, 15%, and 20%
Depending on the person’s filing status and income
When do you not file a form 8949 with schedule D?
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
Non-capital assets
Assets held for business use
Or created by a taxpayer for purposes of earning revenue - copyright or inventory
Examples of non-capital assets
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
Reporting the gains and losses from the sale of business assets
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
What is the holding period for non-taxable stock dividend or stock splits?
Stock shares acquired because of a non-taxable stock dividend or stock split have the same holding period as the original shares owned
Can a taxpayer deduct capital losses
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
Carryover losses
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
How long can capital losses be carried over
Indefinitely during the taxpayers life
But cannot be carried over to a beneficiary
NFTs
Nonfungible tokens
Digital assets are treated as…
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
Married taxpayers disadvantage for capital losses
Deduction limit is $3000 for unmarried taxpayers and also for married filing jointly
Married filing separately, Files only get $1500 loss limit
How are capital losses calculated against ordinary income
The $3000 or $1500 limit reduces the taxpayers ordinary income by $3000 or $1500
Wash sales
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
Wash sales – are applied to
Only stocks and securities
Wash sales – when only repurchasing a percentage of shares
Only the purchase percentage is disallow, but the remaining loss may be recognized
Wash sale rules do not apply to
Professional securities, dealers or stockbrokers
Preferred stock of a corporation is not considered identical to the common stock of the same corporation
Determining the basis and the gain or loss on a home sale you need…
Need the following
Selling price
Amount realized
Basis
Adjusted basis
Calculating the” amount realized” when selling a home
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
Basis in a home
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
Calculating the” adjusted basis” for a home
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
How are Home sale gain or loss taxed/reported
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
Related party transaction rules
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
More than 50% control rule
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
Gross profit percentage – how to calculate
The gross profit number divided by the full price received
Installment sales
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
The installment method cannot be used for
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
Installment sale – related persons – holding period
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
What does it mean to abandon a worthless security?
A taxpayer must permanently surrender all rights to it and receive no consideration in exchange
A loss from worthless securities
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
What is section 1244
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 :
- At the time such stock is issued, such corporation was a small business corporation.
- Such stock was issued by the corporation for money or other property, and
- 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
A corporation is a “ small business corporation” only for purposes of section 1244 stock if…
The amount of money and property received by the corporation for the stock it issued does not exceed $1 million
Section 1244 small business stock – special tax treatment
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
