from a tax perspective the real advantages of investing in capital assets
(1) gains are deferred for tax purposes until the taxpayer sells or otherwise disposes of the assets18 and
(2) gains generally are taxed at preferential rates relative to ordinary income.
Why the favorable treatment?
One reason is that taxpayers may not have the wherewithal (cash) to pay the tax on their gains until they sell the investment.
Another is that the preferential tax rate provides an incentive for taxpayers to invest in assets that may stimulate the economy
most long-term capital gains are taxed at either 0 percent, 15 percent, or 20 percent,
depending on the rate at which the gains would be taxed if they were ordinary income.
Long-term capital gains that would be taxed at 10 or 15 percent
as ordinary income are taxed at 0 percent;
Short-term capital gains are taxed
at ordinary rather than preferential rates.
long-term capital gains are taxed
at preferential rates.
gains that would be taxed at 39.6 percent as ordinary income
are taxed at 20 percent;
unrecaptured �1250 gain
certain long-term capital gains are taxed at a maximum rate of 25 percent
collectibles and qualified small business stock
others are taxed at a maximum 28 percent rate
losses on the sale of personal-use assets are not deductible
therefore never become part of the netting process.
When taxpayers sell capital assets at a loss to related parties,
they are not able to deduct the loss.
If the taxpayer believes that the stocks with unrealized losses are likely to appreciate in the near future, she may prefer not to sell those stocks but rather to keep them in her investment portfolio. What might this taxpayer do to deduct the losses whil
For one, she might be tempted to sell the stocks and then immediately buy them back. Or, she might buy more of the same stock and then sell the stock she originally held to recognize the losses. With this strategy, she hopes to realize (and then recognize
wash sale
occurs when an investor sells or trades stock or securities at a loss and within 30 days either before or after the day of sale buys substantially identical stocks or securities.
Because the day of sale is included, the 30 days before and after period creates a 61-day window
during which the wash sale provisions may apply.30
When taxpayers invest in capital assets and hold the assets for more than a year, they receive at least two benefits.
First, they are able to defer recognizing gains on the assets until they sell them�the longer the deferral period, the lower the present value of the capital gains tax when taxpayers ultimately sell the assets. Second, they pay taxes on the gains at prefe
Gains from two types of capital assets are taxable at a maximum 28 percent rate.
The first type, collectibles, consists of works of art, any rug or antique, any metal or gem, any stamp or coin, any alcoholic beverage, or other Page 7-11similar items held for more than one year.
The second type is qualified small business stock held fo
Short-Term or
Long-Term Type Maximum Rate
Short-term All 39.6%*
Long-term Collectibles 28*
Held > 5 years Qualified small business stock 14%**
Long-term Unrecaptured �1250 gain from depreciable realty 25*
Long-term All remaining capital (and �1231 gains) gain not included elsewhere 20�,�
Taxpayers can deduct up to $3,000 ($1,500 if married filing separately) of net capital losses against ordinary income. Net capital losses in excess of $3,000 ($1,500 if married filing separately) retain their short- or long-term character and are carried
Short-term losses are applied first to reduce ordinary income when the taxpayer recognizes both short- and long-term net capital losses. Capital loss carryovers for individuals never expire.
Three years ago, Adrian purchased 100 shares of stock in X Corp. for $10,000. On December 30 of year 4, Adrian sells the 100 shares for $6,000.
b. Assume the same facts as in part a, except that on January 20 of year 5, Adrian purchases 100 shares of X Co
Adrian has a realized $4,000 long-term capital loss on the sale of the 100 shares. However, she has purchased substantially identical stock within the 61 day period (30 days before the sale until 30 days after the sale); therefore, her loss is limited by
A taxpayer's investment interest expense deduction for the year
is limited to the taxpayer's net investment income for the year
The three loss limits
are the tax-basis, at-risk, and passive loss limits.
The at-risk rules
are meant to limit the ability of investors to deduct "artificial" ordinary losses produced with certain types of debt.
These rules serve to limit ordinary losses to a taxpayer's economic risk in an activity.
passive activity loss (PAL) rules
a passive activity as "any activity which involves the conduct of a trade or business, and in which the taxpayer does not materially participate.
Under the passive activity loss rules, each item of a taxpayer's income or loss for the year is placed in one of three categories. Losses from the passive category cannot offset income from other categories.
Passive activity income or loss�income or loss from an activity in which the taxpayer is not a material participant.
Portfolio income�income from investments including capital gains and losses, dividends, interest, annuities, and royalties.
Active busines
...
On the sale, current and suspended passive losses from the activity are first applied to reduce gain from the sale of the activity, then to reduce net passive income from other passive activities, and then to reduce nonpassive income.
A taxpayer who is an active participant in a rental activity
may be allowed to deduct up to $25,000 of the rental loss against other types of income.
To be considered an active participant, the taxpayer must
(1) own at least 10 percent of the rental property and
(2) participate in the process of making management decisions such as approving new tenants, deciding on rental terms, and approving repairs and capital expenditures.
interest income is taxed at ordinary rates
dividend income is generally taxed at lower capital gains rates.
the consequences of holding corporate or Treasury bonds are very similar. The two primary differences are that
(1) interest from Treasury bonds is exempt from state taxation while interest from corporate bonds is not and
(2) Treasury bonds always pay interest periodically while corporate bonds may or may not.
the amount of interest income taxpayers recognize when they redeem the bonds
is the excess of the bond proceeds over the taxpayer's basis (purchase price) in the bonds.
the specific identification method
can choose to sell their high-basis stock first, minimizing their gains or increasing their losses on stock dispositions.
gross investment income
includes interest, annuity, and royalty income not derived in the ordinary course of a trade or business. It also includes net short-term capital gains, and nonqualified dividends. However, investment income generally does not include net long-term capita
Unused investment interest expense:
is carried forward indefinitely.
miscellaneous itemized deductions
investment advice,
tax return preparation fees,
an employee's job-related magazine subscriptions,
and other unreimbursed employee business expenses
Taxpayers can elect to include long-term capital gains and dividends in investment income
but must tax them at the ordinary (not the preferential) rate.
The tax imposed is 3.8 percent of the lesser of
(a) net investment income or
(b) the excess of modified adjusted gross income over $250,000 for married-joint filers and surviving spouses, $125,000 for married separate filers, and $200,000 for other taxpayers.
from a tax perspective the real advantages of investing in capital assets
(1) gains are deferred for tax purposes until the taxpayer sells or otherwise disposes of the assets18 and
(2) gains generally are taxed at preferential rates relative to ordinary income.
Why the favorable treatment?
One reason is that taxpayers may not have the wherewithal (cash) to pay the tax on their gains until they sell the investment.
Another is that the preferential tax rate provides an incentive for taxpayers to invest in assets that may stimulate the economy
most long-term capital gains are taxed at either 0 percent, 15 percent, or 20 percent,
depending on the rate at which the gains would be taxed if they were ordinary income.
Long-term capital gains that would be taxed at 10 or 15 percent
as ordinary income are taxed at 0 percent;
Short-term capital gains are taxed
at ordinary rather than preferential rates.
long-term capital gains are taxed
at preferential rates.
gains that would be taxed at 39.6 percent as ordinary income
are taxed at 20 percent;
unrecaptured �1250 gain
certain long-term capital gains are taxed at a maximum rate of 25 percent
collectibles and qualified small business stock
others are taxed at a maximum 28 percent rate
losses on the sale of personal-use assets are not deductible
therefore never become part of the netting process.
When taxpayers sell capital assets at a loss to related parties,
they are not able to deduct the loss.
If the taxpayer believes that the stocks with unrealized losses are likely to appreciate in the near future, she may prefer not to sell those stocks but rather to keep them in her investment portfolio. What might this taxpayer do to deduct the losses whil
For one, she might be tempted to sell the stocks and then immediately buy them back. Or, she might buy more of the same stock and then sell the stock she originally held to recognize the losses. With this strategy, she hopes to realize (and then recognize
wash sale
occurs when an investor sells or trades stock or securities at a loss and within 30 days either before or after the day of sale buys substantially identical stocks or securities.
Because the day of sale is included, the 30 days before and after period creates a 61-day window
during which the wash sale provisions may apply.30
When taxpayers invest in capital assets and hold the assets for more than a year, they receive at least two benefits.
First, they are able to defer recognizing gains on the assets until they sell them�the longer the deferral period, the lower the present value of the capital gains tax when taxpayers ultimately sell the assets. Second, they pay taxes on the gains at prefe
Gains from two types of capital assets are taxable at a maximum 28 percent rate.
The first type, collectibles, consists of works of art, any rug or antique, any metal or gem, any stamp or coin, any alcoholic beverage, or other Page 7-11similar items held for more than one year.
The second type is qualified small business stock held fo
Short-Term or
Long-Term Type Maximum Rate
Short-term All 39.6%*
Long-term Collectibles 28*
Held > 5 years Qualified small business stock 14%**
Long-term Unrecaptured �1250 gain from depreciable realty 25*
Long-term All remaining capital (and �1231 gains) gain not included elsewhere 20�,�
Taxpayers can deduct up to $3,000 ($1,500 if married filing separately) of net capital losses against ordinary income. Net capital losses in excess of $3,000 ($1,500 if married filing separately) retain their short- or long-term character and are carried
Short-term losses are applied first to reduce ordinary income when the taxpayer recognizes both short- and long-term net capital losses. Capital loss carryovers for individuals never expire.
Three years ago, Adrian purchased 100 shares of stock in X Corp. for $10,000. On December 30 of year 4, Adrian sells the 100 shares for $6,000.
b. Assume the same facts as in part a, except that on January 20 of year 5, Adrian purchases 100 shares of X Co
Adrian has a realized $4,000 long-term capital loss on the sale of the 100 shares. However, she has purchased substantially identical stock within the 61 day period (30 days before the sale until 30 days after the sale); therefore, her loss is limited by
A taxpayer's investment interest expense deduction for the year
is limited to the taxpayer's net investment income for the year
The three loss limits
are the tax-basis, at-risk, and passive loss limits.
The at-risk rules
are meant to limit the ability of investors to deduct "artificial" ordinary losses produced with certain types of debt.
These rules serve to limit ordinary losses to a taxpayer's economic risk in an activity.
passive activity loss (PAL) rules
a passive activity as "any activity which involves the conduct of a trade or business, and in which the taxpayer does not materially participate.
Under the passive activity loss rules, each item of a taxpayer's income or loss for the year is placed in one of three categories. Losses from the passive category cannot offset income from other categories.
Passive activity income or loss�income or loss from an activity in which the taxpayer is not a material participant.
Portfolio income�income from investments including capital gains and losses, dividends, interest, annuities, and royalties.
Active busines
...
On the sale, current and suspended passive losses from the activity are first applied to reduce gain from the sale of the activity, then to reduce net passive income from other passive activities, and then to reduce nonpassive income.
A taxpayer who is an active participant in a rental activity
may be allowed to deduct up to $25,000 of the rental loss against other types of income.
To be considered an active participant, the taxpayer must
(1) own at least 10 percent of the rental property and
(2) participate in the process of making management decisions such as approving new tenants, deciding on rental terms, and approving repairs and capital expenditures.
interest income is taxed at ordinary rates
dividend income is generally taxed at lower capital gains rates.
the consequences of holding corporate or Treasury bonds are very similar. The two primary differences are that
(1) interest from Treasury bonds is exempt from state taxation while interest from corporate bonds is not and
(2) Treasury bonds always pay interest periodically while corporate bonds may or may not.
the amount of interest income taxpayers recognize when they redeem the bonds
is the excess of the bond proceeds over the taxpayer's basis (purchase price) in the bonds.
the specific identification method
can choose to sell their high-basis stock first, minimizing their gains or increasing their losses on stock dispositions.
gross investment income
includes interest, annuity, and royalty income not derived in the ordinary course of a trade or business. It also includes net short-term capital gains, and nonqualified dividends. However, investment income generally does not include net long-term capita
Unused investment interest expense:
is carried forward indefinitely.
miscellaneous itemized deductions
investment advice,
tax return preparation fees,
an employee's job-related magazine subscriptions,
and other unreimbursed employee business expenses
Taxpayers can elect to include long-term capital gains and dividends in investment income
but must tax them at the ordinary (not the preferential) rate.
The tax imposed is 3.8 percent of the lesser of
(a) net investment income or
(b) the excess of modified adjusted gross income over $250,000 for married-joint filers and surviving spouses, $125,000 for married separate filers, and $200,000 for other taxpayers.