1. 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

2. 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

3. 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

4. Basis  Increased by income Reinvested dividends in mutual funds  Decreased by losses  Decreased by distributions  S corporations Increased by loans to corporation

5. 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%

6. 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

7. 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

8. 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

9. 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 short- term and long-term if amounts are carried over

10. 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