{"id":958,"date":"2012-07-21T07:30:13","date_gmt":"2012-07-21T11:30:13","guid":{"rendered":"http:\/\/www.miblaw.com\/lawschool\/?p=958"},"modified":"2012-07-21T09:53:28","modified_gmt":"2012-07-21T13:53:28","slug":"federal-tax-outline-6","status":"publish","type":"post","link":"http:\/\/www.miblaw.com\/lawschool\/federal-tax-outline-6\/","title":{"rendered":"Federal Income Tax Outline – Page 6 Capital Gains and Losses"},"content":{"rendered":"

Capital Gains and Losses \u2013 Chapter 21<\/strong><\/h1>\n

“Capital” is usually dependent upon:<\/p>\n

1. Whether it arises in a transaction involving a “capital asset”<\/p>\n

2. Whether the capital asset has been the subject of a “sale or exchange”<\/p>\n

3. How long the taxpayer has “held” the asset
\n*There are some statutes that may\u00a0artificially\u00a0accord capital gain or loss treatment to some transactions which do not actually involve the sale or exchange of a capital asset.
\nSection 1222<\/p>\n

(1) Short-term capital gain – gain from the sale or exchange of a capital asset held for not more than 1 year<\/p>\n

(2) Short-term capital loss – loss from the sale or exchange of a capital asset held for not more than 1 year<\/p>\n

(3) Long-term capital gain – held for more than 1 year<\/p>\n

(4) Long-term capital loss – held for more than 1 year
\n(5)-(8) Netting of short-term losses against short-term gains and long-term losses against long-term gains<\/p>\n

STCG – STCL = Net short-term capital gain or loss (1222(5) and (6))<\/p>\n

LTCG – LTCL = Net long-term capital gain or loss (1222(7) and (8))
\nReview numbers on page 691<\/p>\n

Net gains can arise in three situations:<\/p>\n

1. A net short-term gain in excess of a net long-term loss (taxed at ordinary income)<\/p>\n

2. A net long-term gain in excess of a net short-term loss (net capital gain<\/em>\u00a0Section 1222(11))<\/p>\n

3. A combination of a net short-term gain and a net long-term gain
\nCollectible LTCG rate = 28%<\/p>\n

If there is a “net capital gain,” Section 1(h) comes into play.<\/p>\n

 <\/p>\n

Corporation v. Individual – Treatment of Capital Gains
\n<\/strong><\/h3>\n
    \n
  • Corporations compute and net their capital gains like noncorporate taxpayers but no preferential tax treatment is provided to corporations.<\/li>\n
  • Gains – noncorporate taxpayer has the advantage because of the preferential rate<\/li>\n
  • Losses \u2013 noncorporate taxpayer can offset ordinary income up to $3,000; corporations can only deduct losses from the extent of their gains\n
      \n
    • However, Corporations – for carryover it is ALWAYS a short-term capital loss regardless of its origin (back three years, forward five years)<\/li>\n
    • Individuals can only carry forward losses<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n

       <\/p>\n

      The Mechanics of Capital Losses<\/strong><\/h2>\n

      Section 165 – primary code section that determines whether a loss is deductible<\/p>\n

        \n
      • Capital losses are generally deductible only from or against capital gains.<\/li>\n
      • Any capital loss balance remaining is carried forward into succeeding taxable years (retaining either LT or ST capital loss)<\/li>\n<\/ul>\n

         <\/p>\n

        Restrictions on capital losses offsetting ordinary income<\/strong><\/p>\n

          \n
        • 1211(b) limitation<\/strong> – capital losses are deductible only to the extent of capital gains plus, if such losses exceed such gains, an amount of ordinary income not to exceed the\u00a0lower<\/em>\u00a0of $3,000 ($1,500 married individual filing separately) or the excess of such losses over such gains.<\/li>\n
        • 1212(b) Carryover<\/strong>– Capital losses not utilized in the year incurred are carried over into subsequent taxable years and treated as LT or ST losses, depending on their original character.\n
            \n
          • If the sum under 1211(b) does not exceed $3,000 of excess losses over gains, there is no “net capital loss,” no carryover, and no need to use 1212(b)<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n

            Make the 1212(b)(2) computation first, before computing carryover losses under Section 1212(b)(1)<\/p>\n

            The amount of the carryover will be the amount of the net short-term and net long-term capital losses reduced by the $3,000 amount that wiped out ordinary income. The character of the loss (ST or LT) remains the same.<\/p>\n

             <\/p>\n

            1212(b)(2) Constructive ST Capital Gain<\/strong> – If the taxpayer has both net ST and net LT capital losses, the net ST capital loss is used first and then the net LT capital loss to eliminate the 1211(b) $3,000 deduction from ordinary income.<\/p>\n

             <\/p>\n

            Example________________________________________<\/span><\/p>\n

            LT Gain \u00a0 \u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0$400 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0ST gain \u00a0 \u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0$400<\/p>\n

            LT Loss \u00a0 \u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0$2,400 \u00a0 \u00a0 \u00a0 ST loss \u00a0 \u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0$2,000<\/span><\/p>\n

            Net LT Loss \u00a0 \u00a0(2,000) \u00a0 \u00a0 \u00a0Net ST loss \u00a0 \u00a0 (1,600)<\/p>\n

             <\/p>\n

            becomes:<\/em><\/p>\n

            LT gain \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$400 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0ST gain \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$3,400<\/p>\n

            LT Loss \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$2,400 \u00a0 \u00a0 \u00a0 ST loss \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$2,000<\/span><\/p>\n

            Net LT Loss \u00a0 \u00a0 (2,000) \u00a0 \u00a0 Net ST Gain \u00a0 \u00a0 1,400<\/p>\n

             <\/p>\n

            1212(b)(1)(B) – There is a $600 excess of the $2,000 net LT capital loss. This is treated as a LT capital loss in the succeeding year.<\/p>\n

            _______________________________________________<\/p>\n

            Capital Losses are reborn indefinitely in succeeding taxable years until finally utilized or until their demise at the taxpayer’s death.<\/em><\/p>\n

             <\/p>\n

            Federal Tax Outline – Page 5<\/a><\/p>\n

            Federal Tax Outline – Page 7<\/a><\/p>\n

             <\/p>\n

            This Federal Tax Outline is keyed to Fundamentals of Federal Income Taxation, 15 edition, Foundation Press.<\/p>\n