For LTBH type and newcomers,
Year 2001 new tax law changes,
Capital Gains:
For tax years beginning after December 31, 2000, the maximum capital gain rates for assets held more than five years are eight percent and 18 percent (rather than 10 percent and 20 percent). The eight-percent rate applies to all eligible property sold after 2000, but the 18-percent rate applies only to assets whose holding period begins after December 31, 2000. Thus, no gain will be taxed at the 18-percent rate until 2006. The new rates apply for the regular tax and the alternative minimum tax.
Election. If you hold a capital asset or section 1231 asset on January 1, 2001, you may elect to treat the asset as having been sold on that date for an amount equal to its fair market value, and as having reacquired it on that date for an amount equal to that value. You also may elect to treat any readily tradable stock (that is a capital asset) not sold before January 2, 2001, as having been sold for its closing market price on the next business day. A taxpayer who makes the election recognizes gain but not loss. Even though you cannot deduct the loss, any gain you recognize after five years is eligible for the 18-percent rate. Your basis in the reacquired asset is its closing market price or fair market value, whichever applies, on the date of the deemed sale, whether the deemed sale results in a gain or unallowed loss.
You may not revoke the election. By making the election, you make the 18-percent tax rate available for property you acquired before 2001. You also may want to make the election if you have recognized capital losses in 2001 that would otherwise not be deductible until later years. For example, if you sold stock and recognized a $12,000 loss, you could elect to tax up to $12,000 gain from stock you still own and use the loss to offset that gain.
Examples:
1. On January 4, 2001, you sell stock that you acquired in 1995. The gain is eligible for the eight-percent rate to the extent it would be taxed in the 15-percent bracket. Any remaining gain is taxed at a maximum rate of 20 percent because the stock was acquired before 2001.
2. On January 4, 2006, you sell for $6,000 stock that you acquired in 2001 for $1,000. The gain is eligible for the eight-percent rate to the extent it would be taxed in the 15-percent bracket and, because the stock was acquired after 2000, gain is eligible for the 18-percent rate to the extent it would be taxed in a higher bracket.
3. The facts are the same as in example 2 except you acquired the stock in 1998 for $1,000. The value of the stock based on its closing price on January 2, 2001, is $3,000, and you elect to include $2,000 gain ($3,000 – $1,000) on your 2001 tax return. The gain is taxed at the 10-percent or 20-percent rates. Your basis in the stock is now $3,000. When you sell the stock in 2006, the $3,000 gain ($6,000 – $3,000) is eligible for the 18-percent rate because you are considered to have acquired the stock on January 2, 2001.
Making the Election. Because most taxpayers use the calendar year, the election will be made on the 2001 tax return. The election generally must be made by the due date of the 2001 return (including extensions). Fiscal-year taxpayers will make the election using 2000 forms. See the 2000 Form 4797 for instructions on how to make the election.
Before you make the election, you should compare the tax savings on the gain you expect to realize after January 2, 2001 with the amount you could earn on the additional tax you will pay when you file your 2001 return. Also keep in mind that if you sell the stock before you have held it for the requisite time, the 10-percent or 20-percent rate will apply to any additional gain you realize.
PS. No intention to be anyone's bean counter :-) |
