New Capital Gains Tax Return for 2011 Tax Returns

This may seem like a dormant development, not a dramatic turn of events. After all, it’s just a new form for reporting the same old thing, gains or losses from stock, real estate or other investments. Corn nothing which has an impact this most basic line in the tax law should make you sit up and read it.

Also, this is from the IRS – the Oracle itself, giving you a New way to report capital gains and losses.

Appendix D is so last year! You used to report capital gains and losses on Program. Now in most cases use new Form 8949 to report capital gain and capital loss transactions. Program— the form traditionally used to show individual transactions — still exists. But now it is a summary sheet showing the total selling price, basis and other adjustments for all transactions and to determine the tax.

For securities bought and sold in 2011, the Form 1099-B issued by the broker normally indicates your basis. The information on this form will help you complete Form 8949 correctly. See the instructions for Form 8949 and Appendix D for details.

What do you care? A professor once told me that tax lawyers spend a third of their time trying to convert ordinary income into capital gains. He may be right, but he may have underestimated it. The line between capital gain and ordinary income has always been important.

For most of the history of our tax law, there has been a significantly lower rate on capital gains. To see Historical capital gains and taxes. Today, that 15% rate is 20 percentage points below the ordinary income rate. The classification of capital gains is also important for the basis. The corollary of the treatment of capital gains is generally the basic clawback even before one has a gain.

Then, too, there are capital losses. Individuals often find themselves trapped with large accumulated capital losses from which they can only benefit at a painfully slow rate. Some taxpayers argue for capital gains treatment not because they are trying to claim the 15% rate, but to absorb accumulated losses that might otherwise languish until the next Ice Age!

For the entities, it is mixed. The shareholders of Company S benefit from the transfer of these elements to their Schedules K-1. Ditto for limited liability companies and general partnerships. C corporations do not enjoy a preferential tax rate, but even they may care about this distinction.

Thus, the distinction between capital and ordinary remains vital, not only for planners and those dealing with tax controversies, but also for legislators. To see Capital gains tax rates benefit the rich to feed the growing gap between rich and poor. Look no further than the interest-bearing debate. To see Tax gift to the rich. Should private equity and hedge fund titans pay 15% when most of us pay 35% tax?

Ultimately, it’s the same issue raised by Warren Buffett who rates his own tax rate against that of his secretary. To see Buffett’s tax buffet is not Smorgasbord. If you can carefully plan and orchestrate your tax life, who wouldn’t pay 15%?

To learn more, see:

Capital gain: limitation period of three or six years?

Favorably taxed sale tax credit

Buffett tax goes Korean

Choice of entity raises tax and liability issues

Robert W. Wood practices law with Wood LLP, in San Francisco. Author of over 30 books, including Taxation of Damage Awards & Settlement Payments (4th ed. 2009, tax institute), it can be reached at [email protected]. This discussion is not intended as legal advice and may not be relied upon for any purpose without the services of a qualified professional.

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