unit 7: capital gains and losses Flashcards
(58 cards)
What are capital assets?
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.
Example of a capital asset transaction:
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.
What are the tax rules for gains on personal-use assets?
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.
Example of a taxable gain on a personal-use asset:
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.
What are the special tax rates for collectibles?
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%.
Example of tax rates for collectibles:
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.
What is Schedule D used for?
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.
Example of using Schedule D:
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.
What is Form 8949 used for?
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.
Example of using Form 8949:
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.
What are noncapital assets?
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.
Example of a noncapital asset transaction:
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.
What is Form 4797 used for?
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.
Example of using Form 4797:
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.
What is the holding period for capital assets?
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.
Example of determining a holding period:
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.
What is “tacking on” for gifted property?
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.
Example of tacking on for gifted property:
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.
What is the holding period rule for inherited property?
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.
Example of inherited property holding period:
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.
How is capital gain or loss calculated?
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.
Example of calculating capital gain or loss:
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.
What is the net capital loss deduction limit?
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.
Example of net capital loss deduction limit:
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.