 Hello and welcome to this session in which we will discuss the concept of capital gain, capital loss, specifically the realized versus recognized. So gains and losses are covered eventually much, much in greater detail in property transactions. So if you're interested, go to my property transaction chapter. In this session, I want to differentiate between the concept of something realized versus recognized, whereas a realized gain or realized loss versus a recognized gain or a recognized loss. So what is a realized gain? Well, a realized gain represent the real amount of gain. Now what is a gain? Well, a gain is when you buy something and you sell it for more what you purchased for. Generally speaking, that's a gain. What is a loss? Generally speaking, you buy something and you sell it for less. This is what happened when we have a realize. It means it's either a gain or a loss resulting from the disposition or exchange property. It's computed by taking the difference between consideration received. Think of the consideration received here as cash. Now you could be receiving something other than cash. You could be receiving property. You could be receiving some other asset. The fair value of that asset will be considered consideration received. But usually between individuals and most transaction, the common exchange is cash, but it doesn't have to be cash. But the formula is consideration received or sometime we call it a Mount realized and the property adjusted basis. The property adjusted basis is usually the cost minus any depreciation usually equal to the adjusted basis of the property. So what we do is we compare how much we received versus the adjusted basis of the property. Assuming we took depreciation. If we did not take depreciation, the cost is usually the adjusted basis unless we added more to that cost. In other words, our basis went up. So this is the formula to figure out whether we realized a gain or we recognized the gain. That's good. That's considered this a step one. Step two, we need to know what is recognized. If we experienced a gain, is that gain taxable? Is that gain recognized? Recognized means taxable on the form or is that loss recognized in terms of deductible? So we need to find out whether this gain is taxable or whether the loss is deductible. So recognized gain or loss is the amount that should be included in gross income or deducted from gross income because we're going to learn later that some gains we might be able to defer or who knows it may not be taxable. Some losses we can deduct and others we cannot deduct. So that's why we need to know the realized amount. We don't know to recognize unless you know the realized. So the first thing is, do you know how to compute your realized? After you figure out the realized what really happened, now tell me is it taxable or is it deductible if it's a loss? Where do capital gains and capital losses generate from for individuals? They result from the sale of capital asset. What are capital asset? Well, specifically personal use asset. Personal use assets are assets that are used for personal purposes like your chair and the chair I'm sitting on, my desk, actually my desk is business because I'm using it for business. But think about the desk that you use assuming you don't have a business, your personal vehicle. Now your personal vehicle could be used for business, but if you don't have a business, then it's a personal use asset. This is what we buy personal use asset, your furniture at the house, that's personal use asset, your cell phone, personal use asset, assuming you're not using it for business or asset health for investment purposes. Here we're talking about stocks and bonds. Before we proceed any further, I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation, as well as your accounting courses. My CPA material is aligned with your CPA review course, such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today. No obligation, no credit card required. From a foreign perspective, capital gains and capital losses are reported on schedule one with additional income or loss for that matter. We're going to find out how do we treat gains and losses shortly. Notice here other gains and losses, and basically what we have to do is to prepare form called 4797. We don't cover this in here, but we'll cover it later on. Then if it's gain or loss, it gets netted, combine it all, and it goes to your 1040 under other income with all the combined with all the other income. Now what are the classification and tax rate that are subject to capital gains and losses? So when dealing with personal use asset, again, personal use, personal computer, anything that's for personal use, any gain to be recognized. So if you sell a personal asset, again, you sell your refrigerator, you're not going to get a gain, but let's assume you do experience a gain. Well, that gain is recognized, or you sell your personal car. For the past two, three years, used car went up in value, so if you sold your car and you realized a gain, you would have to recognize the gain, although it's a personal car. However, any loss is not deductible. Now think about it, why? Think about all the assets that you buy for personal use. Think about your refrigerator, going back to this example. Well, guess what? If you use your refrigerator, there is no way you're going to sell it for a gain. Therefore, what people would do if they can deduct their losses, well, they will buy something, they will use it up, then they sell it at a loss and get a tax deduction from the government. The government says no, losses are not deductible. However, gains, because now you have the money, you have the ability to pay, you'll have to pay us. So this is how it works. Now, capital gains and capital losses fall into one of the following four categories, and this is going to be discussed much, much, much more in details later. Short-term capital gains, short-term capital loss, and short-term means 12 months or less. Long-term capital gains, long-term capital loss, obviously more than a year. That's long-term. Long-term capital gain, long-term capital loss. For now, it's important to note that short-term capital gain, if you have any short-term capital gain, it's treated as ordinary income. So basically, it's based on your individual tax rate. Whatever your tax rate is, it's considered as, it's taxed as wages, which is the highest. Now, on the other hand, long-term, if it's a long-term capital gain, long-term, oops, long-term capital gain, if you have a gain that's not short-term, that's long-term. Well, long-term capital gain could be subject to 28% tax rate. If it's considered collectible, don't worry about this. You will worry about that later. Could be sometime, subject to 25%, assuming it's a section 12, 50 under-captured gain, just accept this, some sort of an under-captured gain, go to my property transaction, or it could be subject to 0, 15 or 20%. So notice for long-term capital gain, we have one, two, three, four, five different rates, five different rates, depending on the type of the asset, for example, collectible, or if it's section 12, 50 under-captured gains, or if it's a long-term capital gain, and that's subject to any of these 0, 15 and 20, depending on your tax filing status and your taxable income. And this will change from year to year. Again, this topic is covered much more in depth in a different session. So what happened to losses? What happened if you have short-term capital loss or long-term capital loss? Well, guess what, the good news is individuals are allowed to deduct up to 3,000 of net capital losses from investment. This is to arrive to your AGI. Any excess losses, again, not from personal use asset from investment, like stocks and bonds. If you have more than 3,000, it can be carried forward indefinitely. The good thing is this 3,000, it goes against your ordinary income. And if you cannot use it, you just keep it. And excess capital losses may be carried forward while retaining their classification either short-term or long-term. Let's take a look at a couple of examples. Ciela, an individual, owns a fast food place in year two, sold two vehicles. The first one had been used for four years to deliver food to customers and was sold for 2,000. So notice this is not a personal use. This is a business use vehicle. The second vehicle, which has been used for two years, for personal purpose, was sold at a gain. Determine the capital gain or loss from the disposition. Well, the delivery vehicle, it's considered a business asset. Don't worry just for a business asset. Specifically, it's section 1231 asset because it's held more than 12 months and used in a business. This is the definition of a 12 section 1231 asset. Therefore, the loss of 2000 is section 1231 loss, not a capital loss, which is it's treated differently. Now the gain on the vehicle, the gain on the vehicle, you cannot net them. You have to pay taxes on that depending how much taxes. Well, it could be 0, 15 and 20 because it's a long term over two years and depending on the individual taxable income. Let's look at example two. George's had a short term capital loss of 3,250, a long term capital loss of 2,300. So short term capital loss and another long term capital loss of 2,300. Together that's 4,500 and a short term capital gain plus 1,500 again. So we have losses of 45, gains of 1,500. Determine the amount of capital losses that George is allowed to deduct. Obviously overall, if we net them out, if you notice we have losses, we have gains, they would net out to, actually this is 5,500, not 4,500. 5,500 of losses, 1,500 of gain, we have a net loss of 4,000. What can we do with that net capital loss? Well, if we have more than 4,000, we can deduct 4,000 this year and we can carry the 1,000 forward indefinitely. So you just have to memorize this. After netting the gains and the losses, we have 4,000 in net losses. Why? Because we have 55 in losses overall and again of 1,500, the net is 4,000. What can we do with this 4,000? 3,000 of it can be used against ordinary income and the remaining 1,000 is carried forward indefinitely. Now again, this topic is not, I did not cover this topic in depth because this just gave you a feeling of it, what needs to be done, but it's an important topic that's covered much, much more in property transaction. What should you do now? Go to Farhat Lectures, look at additional MCQs, true, false, additional options, choices that's going to help you do better whether you are a CPA candidate studying for the CPA exam or an enrolled agent, candidate or an accounting student. Good luck, study hard and of course, stay safe.