Module 13 - Capital Gains/Basis and Investment Income

What property generally counts as a capital asset?

Most personal-use and investment property, such as a personal car, stocks, or bonds.

What are common examples of noncapital assets?

Inventory, business supplies, certain receivables, depreciable business equipment, and real estate used in a business.

How is a gain or loss on personal-use property treated?

A gain is generally taxable unless an exclusion applies. A loss is generally nondeductible.

How do you calculate gain or loss on a sale?

Subtract adjusted basis from the amount realized. Selling expenses generally reduce the amount realized.

What is the starting basis of purchased property?

Usually the purchase price plus eligible costs such as sales tax and purchase commissions.

What changes the adjusted basis of property?

Capital improvements generally increase it. Depreciation and returns of capital generally reduce it.

What is the usual basis of inherited property?

Fair market value on the date of death. A later sale of an inherited capital asset is generally treated as long-term.

How do you figure basis for a gift worth less than the donor’s basis?

Use the donor’s adjusted basis to figure gain and gift-date fair market value to figure loss. A sale between the two generally produces neither.

What basis is used to depreciate property converted from personal to business use?

The lower of adjusted basis or fair market value on the conversion date.

How does a stock split affect basis?

Total basis generally stays the same and is spread over the new number of shares.

Do reinvested dividends still count as income?

Yes. Taxable dividends are still reported, and the reinvested amount generally becomes basis in the new shares.

When does a capital gain or loss become long-term?

When the asset is held for more than one year. Exactly one year is short-term.

How are short-term and long-term capital gains taxed?

Net short-term gains generally use ordinary income rates. Most net long-term gains qualify for 0%, 15%, or 20% rates.

What special maximum capital gain rates should you recognize?

28% for long-term collectibles gain and 25% for unrecaptured Section 1250 gain.

How do you net capital gains and losses?

Net short-term items together and long-term items together, then combine the two results.

How much net capital loss can offset other income?

Up to $3,000 per year, or $1,500 if married filing separately. Unused losses carry forward.

When can the wash-sale rule defer a loss?

When you sell stock or securities at a loss and buy substantially identical stock or securities within 30 days before or after the sale.

How are qualified dividends taxed?

They’re included in total ordinary dividends and generally qualify for the lower long-term capital gain rates.

How are mutual fund capital gain distributions treated?

As long-term capital gains, even if you held the fund for a year or less.

How does a return of capital affect your taxes?

It generally reduces your basis first. Any amount received after basis reaches zero is generally a capital gain.

What does Form 1099-B tell you?

It reports broker sales. Check the proceeds, holding period, and whether the broker reported basis to the IRS.

What does Form 1099-DA report?

Proceeds from broker-reported digital asset dispositions. If basis is blank, calculate it from your records.

Can a crypto transaction trigger a gain without cashing out?

Yes. Swapping crypto for another token or spending it can trigger a gain or loss.

How do Form 8949 and Schedule D work together?

Form 8949 generally lists individual sales and adjustments. Schedule D totals the gains and losses.

Where are sales of depreciable business property generally reported?

On Form 4797. Depreciation recapture can cause some of the gain to be taxed as ordinary income.

How much gain can generally be excluded on a qualifying main-home sale?

Up to $250,000, or $500,000 for qualifying joint filers. The usual ownership and use tests each require two of the last five years.

When might the 2025 kiddie tax apply?

When a child has more than $2,700 in unearned income and meets the other tests. Use Form 8615 to calculate it.

How is the Net Investment Income Tax calculated?

It’s 3.8% of the smaller of net investment income or modified AGI above the filing-status threshold. Use Form 8960.