unit 7: capital gains and losses Flashcards

(58 cards)

1
Q

What are capital assets?

A

Capital assets are personal or investment items owned by a taxpayer, such as a primary residence, vacation home, furniture, vehicles, antiques, collectibles, stocks, bonds, mutual funds, and digital assets (e.g., cryptocurrency), excluding those held by professional securities dealers.

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2
Q

Example of a capital asset transaction:

A

Sarah buys a painting for $1,000 as an investment. Five years later, she sells it for $5,000. The painting is a capital asset, and she reports a $4,000 long-term capital gain on Form 8949 and Schedule D.

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3
Q

What are the tax rules for gains on personal-use assets?

A

Gains from the sale of personal-use assets (e.g., main home, vacation home, furniture, jewelry) are usually taxable, subject to certain exclusions, but losses are not deductible and cannot offset capital gains.

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4
Q

Example of a taxable gain on a personal-use asset:

A

Tom sells his personal-use boat, purchased for $10,000, for $15,000 after two years. He must report a $5,000 long-term capital gain on his tax return, but if he sold it for $8,000, the $2,000 loss would not be deductible.

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5
Q

What are the special tax rates for collectibles?

A

Long-term capital gains on collectibles (e.g., artwork, coin collections) held for more than one year are taxed at the individual’s ordinary tax rate, capped at a maximum of 28%.

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6
Q

Example of tax rates for collectibles:

A

Emma sells a rare stamp collection, held for three years, for a $10,000 gain. Her ordinary income tax rate is 35%, but the gain is taxed at 28%, saving her tax compared to ordinary income rates.

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7
Q

What is Schedule D used for?

A

Schedule D is used to report the summary of capital gains and losses from the sale of investment property and most capital gain or loss transactions, netting all transactions for the year.

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8
Q

Example of using Schedule D:

A

John sells stocks and a vacation home in 2024, reporting each transaction on Form 8949. He transfers the totals to Schedule D, which shows a net long-term capital gain of $12,000 for the year.

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9
Q

What is Form 8949 used for?

A

Form 8949 reports specific details of each capital asset sale or exchange, including digital assets, involuntary conversions, nonbusiness bad debts, worthless securities, and qualified opportunity fund transactions, with parts for short-term and long-term assets.

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10
Q

Example of using Form 8949:

A

Lisa sells cryptocurrency and stocks in 2024. She reports each transaction’s basis, sale price, and gain/loss on Form 8949, separating short-term and long-term transactions, then summarizes on Schedule D.

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11
Q

What are noncapital assets?

A

Noncapital assets are business-use or revenue-generating assets, such as inventory, depreciable business property, real property used in a trade, self-produced copyrights, accounts receivable, and stocks held by professional securities dealers.

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12
Q

Example of a noncapital asset transaction:

A

Maria, a retailer, sells inventory for $20,000, purchased for $15,000. The $5,000 gain is reported as ordinary income on Schedule C, not as a capital gain, since inventory is a noncapital asset.

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13
Q

What is Form 4797 used for?

A

Form 4797 is used to report gains and losses from the sale of business property (noncapital assets), with amounts flowing to Schedule D for individual taxpayers, except for inventory sales reported on Schedule C or F.

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14
Q

Example of using Form 4797:

A

Mike, a landscaper, sells a used truck used in his business for a $2,000 loss. He reports the sale on Form 4797, and the loss flows to Schedule D, reducing his taxable income.

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15
Q

What is the holding period for capital assets?

A

The holding period determines if a capital gain or loss is short-term (one year or less) or long-term (more than one year). It starts the day after acquisition and includes the sale date.

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16
Q

Example of determining a holding period:

A

Anna buys stock on March 1, 2024, and sells it on March 2, 2025. The holding period is just over one year (March 2, 2024, to March 2, 2025), so any gain or loss is long-term.

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17
Q

What is “tacking on” for gifted property?

A

For gifted property, the recipient’s holding period includes the donor’s holding period, allowing the combined period to determine if the gain or loss is short-term or long-term.

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18
Q

Example of tacking on for gifted property:

A

Bob gifts stock to his son, held for 8 months. The son holds it for 5 months and sells it. The total holding period (13 months) makes the gain long-term, reported on Form 8949.

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19
Q

What is the holding period rule for inherited property?

A

Inherited property is automatically classified as long-term, regardless of how long the beneficiary or decedent held it, resulting in long-term capital gain or loss on sale.

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20
Q

Example of inherited property holding period:

A

Claire inherits a car from her aunt in 2024 and sells it two months later for a $3,000 gain. The gain is long-term due to the inherited property rule, reported on Schedule D.

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21
Q

How is capital gain or loss calculated?

A

Capital gain or loss is calculated by subtracting the adjusted basis from the amount realized (sale price minus selling expenses) for a stock or property disposition, reported in the year of sale.

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22
Q

Example of calculating capital gain or loss:

A

Tim sells land for $50,000, with $5,000 in selling expenses and a $30,000 adjusted basis. The amount realized is $45,000, resulting in a $15,000 capital gain reported on Form 8949.

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23
Q

What is the net capital loss deduction limit?

A

A taxpayer can deduct up to $3,000 ($1,500 for married filing separately) of net capital losses against ordinary income per year, with excess losses carried over to future years.

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24
Q

Example of net capital loss deduction limit:

A

Rachel has a $10,000 capital loss and $40,000 in wages. She deducts $3,000 against her wages, reducing taxable income to $37,000, and carries over $7,000 to the next year.

25
What is a capital loss carryover?
Unused capital losses exceeding the $3,000 ($1,500 for MFS) annual deduction limit are carried over indefinitely, retaining their short-term or long-term character, but are lost upon the taxpayer’s death.
26
Example of capital loss carryover:
Mark has a $12,000 long-term capital loss in 2024. He deducts $3,000, carrying over $9,000 as a long-term loss to 2025, reported on Schedule D until fully used.
27
How are digital assets treated for tax purposes?
Digital assets (e.g., cryptocurrencies, NFTs) are treated as property, with their sale or exchange resulting in capital gain or loss, and exchanges between digital assets are taxable events.
28
Example of a digital asset transaction:
Alex buys Bitcoin for $5,000 and exchanges it for Ethereum worth $15,000 after two years. He reports a $10,000 long-term capital gain on Form 8949 as a taxable event.
29
What are capital gain distributions from mutual funds?
Capital gain distributions are profits from a mutual fund’s investments, reported to shareholders on Form 1099-DIV, always taxed as long-term capital gains regardless of holding period.
30
Example of capital gain distributions:
Tina owns mutual fund shares for 6 months and receives a $500 capital gain distribution reported on Form 1099-DIV. She reports it as a long-term capital gain on Schedule D.
31
How is the sale of mutual fund shares reported?
The sale of mutual fund shares results in a taxable gain or loss, reported on Form 1099-B and Form 1040, Schedule D, with the basis included by brokers.
32
Example of selling mutual fund shares:
Sam sells mutual fund shares purchased for $10,000 for $12,000 after 18 months. The $2,000 long-term capital gain is reported on Form 1099-B and Schedule D.
33
What is a wash sale?
A wash sale occurs when a taxpayer sells a security at a loss and repurchases a substantially identical security within 30 days before or after, disallowing the loss deduction.
34
Example of a wash sale:
Jane sells 100 shares at a $1,000 loss and buys 100 identical shares 20 days later. The loss is disallowed due to the wash sale rule, and the $1,000 is added to the new shares’ basis.
35
What happens to the basis in a wash sale?
The disallowed loss from a wash sale is added to the basis of the newly purchased stock or securities, postponing the loss deduction until the new securities are sold.
36
Example of wash sale basis adjustment:
Paul sells stock for a $2,000 loss and repurchases it within 30 days. The $2,000 loss is disallowed and added to the new stock’s basis, deductible when he later sells the repurchased shares.
37
What is the amount realized in a home sale?
The amount realized is the selling price (cash, notes, or other property) minus selling expenses (e.g., realtor’s commissions, legal fees, advertising fees, loan charges like points).
38
Example of calculating amount realized in a home sale:
Laura sells her home for $300,000, paying $15,000 in realtor’s fees and $5,000 in legal fees. Her amount realized is $280,000 ($300,000 - $20,000 in expenses).
39
How is the basis in a home determined?
The basis is the purchase cost (for bought homes), building expenses plus land cost (for constructed homes), fair market value at death (for inherited homes), or donor’s adjusted basis (for gifted homes).
40
Example of determining basis in a home:
Greg inherits a home valued at $200,000 at his father’s death. His basis is $200,000. If he sells it for $210,000, he reports a $10,000 long-term capital gain.
41
What is the adjusted basis in a home?
The adjusted basis is the original basis plus increases (e.g., improvements with a useful life over one year) minus decreases (e.g., deductible casualty losses, credits, rebates).
42
Example of calculating adjusted basis in a home:
Sue buys a home for $150,000 and adds a $20,000 kitchen remodel. A $5,000 casualty loss reduces the basis. Her adjusted basis is $165,000 ($150,000 + $20,000 - $5,000).
43
What are the related party transaction loss rules?
Losses on sales between related parties (e.g., immediate family, controlled entities) are not deductible. Gains are taxable, and disallowed losses may reduce gains on subsequent sales to unrelated parties.
44
Example of related party transaction loss rules:
Tom sells stock to his sister for a $3,000 loss, which is not deductible. She sells it later for a $4,000 gain. Her taxable gain is $1,000, reduced by the $3,000 disallowed loss.
45
What is the more than 50% control rule?
Losses on transactions between a taxpayer and a business they control (over 50% ownership, including family ownership) are not deductible, except in complete corporate liquidations.
46
Example of more than 50% control rule:
Lisa, owning 60% of a corporation, sells equipment to it at a $5,000 loss. The loss is not deductible due to the control rule, but a gain on a similar sale would be taxable.
47
What is an installment sale?
An installment sale is a seller-financed sale where at least one payment is received after the tax year of sale, commonly for business real estate, small businesses, or intangibles, reported on Form 6252.
48
Example of an installment sale:
Jack sells a rental property for $500,000, with $100,000 down and $400,000 over four years. He reports the gain proportionally on Form 6252 each year as payments are received.
49
What is the gross profit percentage in an installment sale?
The gross profit percentage is the gross profit (selling price minus adjusted basis) divided by the selling price, used to allocate gain to each installment payment received.
50
Example of gross profit percentage:
Kim sells land for $200,000, with a $50,000 basis, yielding a $150,000 gross profit. The gross profit percentage is 75% ($150,000/$200,000). A $40,000 payment results in a $30,000 taxable gain.
51
What does electing out of the installment method mean?
Electing out means reporting the entire gain in the year of sale, not deferring it, useful if future tax rates are expected to be higher, requiring full gain reporting on Schedule D or Form 4797.
52
Example of electing out of installment method:
Sam sells a business for $300,000 over five years, with a $100,000 basis. Expecting higher future taxes, he elects out, reporting the $200,000 gain in 2024 on Schedule D.
53
What are worthless securities?
Worthless securities (stocks, bonds, stock rights) that lose all value are treated as sold for $0 on the last day of the tax year, reported on Form 8949, with a seven-year amendment period.
54
Example of worthless securities:
Tara’s 1,000 shares, bought for $10,000, become worthless in 2024 due to bankruptcy. She reports a $10,000 capital loss on Form 8949, marking it “WORTHLESS” with a December 31 sale date.
55
What is abandonment of securities?
Abandonment is permanently surrendering all rights to a worthless security without receiving consideration, allowing a capital loss deduction, reported on Form 8949 as “WORTHLESS.”
56
Example of abandonment of securities:
Ken owns stock worth $0 after a company’s bankruptcy. He abandons it in 2024, reporting a $5,000 long-term capital loss on Form 8949, marked “WORTHLESS,” offsetting other income.
57
What is Section 1244 stock?
Section 1244 stock is stock in a small U.S. corporation (capital ≤ $1 million) allowing ordinary loss treatment up to $50,000 ($100,000 for joint filers) for original shareholders, not subject to the $3,000 capital loss limit.
58
Example of Section 1244 stock:
Omar, a single filer, sells Section 1244 stock for a $20,000 loss (basis $30,000, sold for $10,000). He deducts the full $20,000 as an ordinary loss, not limited to $3,000, on his tax return.