Capital Gains and Losses
 Capital assets: everything except
 Inventory
 Depreciable property
 A/R
 All capital gains are taxable
 Sell wife’s diamond ring…
 Unless like kind exchange
 Capital losses deductible if related to
business or investment
 Sell your old shoes for $12. Purchased for $90
Long-term vs. short-term
Long-term: capital assets held for
more than 12 months
 Unless acquired from decedent
 Step into donor’s shoes if received
property as a gift: holding period “tacks”
on to yours
If capital asset has carryover basis
from gift or exchange, then holding
period from carries over also
Basis
 In general, what you paid for the asset
 Includes debt assumed
 Acquired from decedent
 FMV at date of death
 Gain prior to death not taxed
 Acquired from gift
 Carryover basis
 Unless loss, then double basis (should sell)
 Prevents transfers of losses
Basis
 Increased by income
 Reinvested dividends in mutual funds
 Decreased by losses
 Decreased by distributions
 S corporations
 Increased by loans to corporation
Capital gains tax rates
Long-term:
 15%
Scheduled to increase to 20% in 2011
Elections
Dividends:
 Also taxed at capital gains rates
Hold stock for 60 of 120 days beginning 60
days before ex-dividend date
Unless 10% or 15% marginal tax rate
for ordinary income, then 5%
In 2008 -2010, 0%
Capital gains tax rates
Unless 10% or 15% marginal tax rate
for ordinary income, then 5%
In 2008 -2010, 0%
Hmmmm. Transfer appreciated stock
to kids
 Kiddie tax: unearned income above
$1,900 taxed at parents rates
Up to 18 years old: kid
19-23 years old: kid starting in 2008
Capital gains tax rates
25%: to extent of depreciation on real
estate
28%: collectibles
1245 gain: ordinary income
Many countries don’t tax capital gains
 Represent just inflation?
In 2000, represented 12% of
individual income taxes
Capital losses
After netting against capital gains
 Can offset up to $3,000 of other income
with capital losses each year
 Excess carries over to the following years
until entire amount of capital loss is
utilized
Net capital gains and losses
Netting capital gains and losses
 Short-term netted
 Long-term netted
 If both gains, taxed at appropriate rates
 If one gain and one loss, netted
 If both losses, utilize under $3,000 rule
and losses retain their character as shortterm and long-term if amounts are carried
over
Section 1231 gains and losses
Section 1231 assets: depreciable
assets used in business held for more
than one year
 Gains are long-term gains
Must first offset with any Section 1231
losses from last five years
 Losses are ordinary losses
Not subject to $3,000 per year limitation