Federal Employees News Digest

Informed Investor: Tax reporting rules for capital gains and losses: Part I

This is the first of three columns discussing the tax reporting rules for capital gains and losses.

A capital asset is any property held by an individual except for: (1) inventory held mainly for sale to customers in a trade or business; (2) accounts or notes receivable from a trade or business; (3) real estate used in a trade or business or as rental property; (4) supplies used regularly in a trade or business; and (5) self-created copyrights, musical or artistic compositions, letters or memoranda.

In general, a sale or exchange of a capital asset produces a capital gain or a capital loss. The tax rate on a capital gain depends on the holding period, the type of capital asset, and the capital asset owner’s ordinary income tax bracket. The holding period and capital gain tax rates are discussed below.

A capital gain or loss is the difference between the sales price and the owner’s adjusted basis in the capital asset sold. A gain on the sale of property used for personal purposes is taxable as a capital gain. A loss on the sale of property used for personal purposes is not deductible. Deductible losses are allowed only for property used for business or investment or for casualties and thefts.

Capital losses are netted against capital gains. Up to $3,000 of leftover capital losses—1,500 if an individual files as married filing separate—are deductible against ordinary income each year. Ordinary income includes salary, interest, dividend, pension and rental income. Any unused net capital losses are carried forward to the next tax year and may offset capital gains plus up to $3,000 against ordinary income in the following year.

Holding or ownership period. Capital gains and losses must be separated according to how long the property was held, either short-term or long-term. Short-term is a holding period of one year or less and long-term is a holding period of more than one year.

To determine the holding period, the capital asset owner begins counting on the day after the day the property is acquired and includes the date of disposition. The only exception is property acquired by inheritance, which is always treated as long-term property, regardless of how long the property was owned by the decedent. A nonbusiness bad debt is always treated as a short-term capital loss.

For securities—for example, stocks, bonds or exchange-traded funds traded on an established securities market such as the New York Stock Exchange—the holding period begins the day after the trade date that the securities are purchased. The holding period ends on the trade date that the securities are sold. The trade date is different than the settlement date. The settlement date—usually three days after the trade date—is the date the security purchased must be delivered and payment for the purchased securities must be made. The following example illustrates:

Frank purchased 100 shares of XYZ stock on a trade date of Nov. 14, 2014. To qualify for the long-term holding period, Frank could not sell the stock until a trade date of Nov. 15, 2015, or later.

Capital gain tax rates for sales occurring during 2015. For sales that occurred during 2015, short-term capital gains are taxed at the individual’s ordinary tax rate, and long-term capital gain tax rates are 0, 15, 20, 25 or 28 percent, as explained here:

• 28 percent rate. The 28 percent maximum tax rate applies to gains from the sale of: (1) collectibles held more than one year; and (2) Section 1202 qualified small business stock held more than five years.

• 25 percent rate. The 25 percent maximum tax rate applies to unrecaptured Section 1250 gain on sales of property held more than one year.

• 20, 15 or 0 percent. Long-term capital gains not taxed at 28 or 25 percent are taxed at the lower rate, depending on the ordinary tax rate that would otherwise apply if the gain was taxed as ordinary income.

The following table summarizes:

 0, 15 and 20 Percent Long-Term Capital Gain Tax Rates

 

 

 

 Tax rate if gain were
taxed as ordinary income

 

 

 

 Applicable long-term
capital gain tax rate

 

 

 

 10 or 15 percent

 

 

 

 0 percent

 

 

 

 25, 28, 33 or 35 percent

 

 

 

 15 percent

 

 

 

 39.6 percent

 

 

 

 20 percent

 

 

 

Reporting capital gains/losses. Totals for short-term and long-term transactions reported on Form 1099-B for which cost basis may be reported to the IRS and for which the individual has no adjustments can be reported directly on Schedule D, line 1a (short-term) and line 8a (long-term). Individuals can choose to report these transactions on Form 8949. All other sales and dispositions of capital assets are reported on Form 8949 and the totals are carried to Schedule D.



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Contributors

Edward A. Zurndorfer Certified Financial Planner
Mike Causey Columnist
Tom Fox VP for Leadership and Innovation, Partnership for Public Service
Mathew B. Tully Legal Analyst

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