The document summarizes capital gains and loss netting processes and tax treatment. It discusses: 1) The 3-step process to net short-term and long-term capital gains and losses separately before combining results and adding to income. 2) The tax treatment of net capital gains and losses, such as short-term gains taxed as ordinary income, long-term gains taxed at preferential rates up to 20% or 15%. 3) Capital loss carryovers that can offset up to $3,000 of ordinary income each year and are carried over indefinitely if unused.

1. SAMPLE
EA Webinar – Part 1
Topic 6
Capital Gain & Loss Netting Process

2. References Used in Slides
• Color Code Description of Topic - Based on
analysis of last 10 publicly-available exams:
– Red [R] – Basic knowledge topic asked frequently
– Blue [B] – Complex topic asked fairly frequently
– Green [G] – Basic topic asked less frequently
– Yellow [Y] – Complex topic seldom tested
• * (asterisk) - Indicates at least 7 questions on
the topic on last 10 publicly-available exams

3. 3
*6A Capital Gain and Loss Netting Process
[R]
• 3-Step Process – (1) Net all S/Ts, (2) Net all L/Ts, (3) if
same sign, add separately to income; if opposite
signs, add net difference to income (Note: LT > 1yr)
• Final Result – 4 Basic Rules (for one transaction):
– S/T Capital Gain – Treat as ordinary income
– S/T Capital Loss - $3,000 offset against ordinary income
– L/T Capital Gain – 15% max. rate (0% if 10% or15%
ordinary income bracket, 20% if 39.6% ordinary bracket)
– L/T Capital Loss - $3,000 offset against ordinary income
• Figure 1
• Question 1

4. Figure 1
2011 2012 2013 2014 2015
Current-Year Capital Transactions (Before c/o):
ST Gain $16,000 $18,000 $ 3,000 $ 2,000 $ 9,000
ST Loss (18,000) (26,000) ( 2,000) ( 6,000) ( 1,000)
LT Gain 24,000 2,000 8,000 4,000 8,000
LT Loss (12,000) ( 1,000) ( 2,000) ( 8,000) ( 6,000)
Net Results:
Net ST ( 2,000) ( 8,000) ( 3,000) ( 4,000) 7,000
Net LT 12,000 1,000 6,000 ( 4,000) ( 2,000)
Adjusted Gross Income:
Salary $70,000 $70,000 $70,000 $70,000 $70,000
Capital 10,000* ( 3,000) 3,000* ( 3,000) 5,000
AGI $80,000 $67,000 $73,000 $67,000 $75,000
Capital Loss Carryovers (c/o):
ST Loss c/o 0 ( 4,000) 0 ( 1,000) 0
LT Loss c/o 0 0 0 ( 4,000) 0
* Qualifies for 15% maximum rate
4

5. Question 1
During 2014, George sold the following shares of stock:
• Stock Purchased Basis Sold Proceeds
• V Corp. 5/18/09 $ 300 9/3/14 $1,000
• Q Corp. 8/16/13 $3,000 1/6/14 $2,500
• A Corp. 2/14/13 $1,200 1/9/14 $ 600
• J Corp. 3/27/14 $2,000 9/2/14 $3,500
What is George’s net capital gain or loss for 2014?
a. $(1,100)
b. $(1,200)
c. $1,100
d. $1,200
5

6. 6
6B Preferential Tax Rates for Long-term
Capital Gains [G]
• If Net L/T Gain – Determine appropriate rates
• 15% (or 0%) - Basic rate for most L/T capital gains
• 25% - For “Unrecaptured Sec. 1250 Gain” on realty
• 28% - For collectibles, Sec. 1202 stock gain, & all c/o
• Step Netting Process – Four columns for 4 rates:
1. If 15% Nets to a Loss – Net against 28% result first
2. If S/Ts Net to a Loss – Net against 28% result first
3. If 28% Nets to a Loss – Net against 25% result first
4. If 25% Nets to a Loss – Net against 15% result
• Figure 2
• Question 2

7. Figure 2
All 28% 25% 15%
Short-Term Long-Term* Long-Term Long-Term
(4,000) (5,000) 14,000 (10,000)
9,000 4,000 6,000
(9,000) 12,000 1,000
(3,000)
(4,000) 8,000 14,000 ** (3,000)
| (3,000) <--------------------------v
v--------- (4,000)
1,000 **
* Includes any long-term capital loss carryover
** Result - $1,000 taxed at a 28% rate, and $14,000 taxed at a 25% rate
7

8. Question 2
In December, Emily sold an antique rug for $4,100. She
bought the rug two years ago for $1,100. What is her
taxable gain and at what maximum rate will it be taxed?
a. $3,000 long-term capital gain, taxed at regular rate
b. $3,000 long-term capital gain, taxed at 28% rate
c. $1,500 long-term capital gain, taxed at regular rate
d. $1,500 long-term capital gain, taxed at 28% rate
8

9. 9
*6C Tax Treatment of Net Capital Losses [R]
• $3,000 – Maximum combined ordinary income offset
for net S/T and net L/T losses each yr. (use S/T first)
• $1,500 – Married – filing separately limit
• If Taxable Income < Capital Loss – Full limit (up to
$3,000) still assumed utilized in computing carryover
• Capital Loss Carryover – Indefinite (retain character)
• Decedent’s Return – No carryovers possible
• Question 3 and Question 4

10. Question 3
During the current year, Nancy had the following transactions:
– Short-term capital loss $(2,400)
– Short-term capital gain 2,000
– Short-term capital loss carryover from 2013 (1,400)
– Long-term capital gain 3,800
– Long-term capital loss (8,000)
What is the amount of her capital loss deduction, and what is the amount and
character of her capital loss carryover to the next year?
• Deduction Carryover
a. $0 $6,000 long-term
b. $3,000 $3,000 long-term
c. $6,000 $-0-
d. $3,000 $3,000 short-term
10

11. Question 4
Bob sold securities in 2014. The sales resulted in a capital
loss of $7,000. He had no other capital transactions. He and
his wife Gloria decide to file separate returns for 2014. His
taxable income was $26,000. What amount of capital loss
can he deduct on his 2014 return and what amount can he
carry over to 2015?
a. $7,000 in 2014 and $0 carryover
b. $3,000 in 2014 and $4,000 carryover
c. $4,000 in 2014 and $3,000 carryover
d. $1,500 in 2014 and $5,500 carry over
11