Capital gain netting rules

From: Rich Carreiro <rlcarr@animato.arlington.ma.us>
Subject: Capital gain netting rules
Date: 30 Nov 1999 00:01:06 -0500

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To try to boost (useful) traffic on the list, I thought I'd
submit this brief post on how capital gains are netted, as (judging
from posts on Usenet and elsewhere) the topic can sometimes be confusing.

Short-term gains (losses) = gain (loss) from capital assets held one year
or less (you count using trade execution dates, not trade settlement dates).

Long-term gains (losses) = gain (loss) from capital assets held for more
than one year.

The netting rules:
(a) Combine short-term (ST) gains with ST losses to get net ST gain (loss).
(b) Combine long-term (LT) gains with LT losses to get net LT gain (loss).
(c) Combine net LT gain (loss) with net ST gain (loss) to get net capital
    gain (loss).
(d) If there is a net capital gain, the entire gain counts as adjusted
    gross income for all purposes (except for the ultimate calculation
    of tax).  As for the tax on the gain, if there is both a net capital
    gain and a net LT capital gain, the smaller of the two is taxed at
    the special, favorable capital gain rates and the remainder (if any)
    of the net gain is taxed as ordinary income.  If there is a net capital
    gain and no net LT capital gain, the entire capital gain is taxed as
    ordinary income.
(e) If there is a net capital loss, the loss (though not more than $3000
    if the loss is over $3000) reduces adjusted gross income for all
    purposes (including the ultimate calculation of tax).  To the extent
    the loss is over $3000, the excess is carried over to the following
    year, with the ST and LT components of the loss being separately
    carried over.  The Schedule D instructions will lead you to fill out
    a Capital Loss Carryover Worksheet which you retain for your records
    but do not file.

- -- 
Rich Carreiro                            rlcarr@animato.arlington.ma.us

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