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Flashcards in Taxes: Capital Gains & Losses Deck (10)
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1

Taxes
Capital Gains and Losses
Eligibility

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

2

Taxes
Capital Gains and Losses
Duration

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

3

Taxes
Capital Gains and Losses
Individuals
Netting Process

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

4

Taxes
Capital Gains and Losses
Individuals
Individuals - Preferential Tax Rates

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

5

Taxes
Capital Gains and Losses
Individuals
Net Investment Income
Other

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%

6

Taxes
Capital Gains and Losses
Individuals
Order of Netting

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

7

Taxes
Capital Gains and Losses
Individuals
Qualifying Small Business Stock

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

8

Taxes
Capital Gains and Losses
Individuals
Section 1244 Stock

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)

9

Taxes
Capital Gains and Losses
Corporations

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

10

Taxes
Capital Gains and Losses
Sales of Capital Assets

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

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