 Income tax 2022-2023. Capital gain or loss. Let's do some wealth preservation with some tax preparation. Support Accounting Instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. Most of this information comes from the Form 1040 Instructions Tax Year 2022. You can find it at the IRS website, irs.gov, irs.gov. When looking at the income tax formula, we're focused once again online, one that being income, remembering that the first half of the income tax formula is in essence an income statement, although a strange one, income up top, the equivalent of expenses being the deductions to get down to the equivalent of net income, that being taxable income. Our objective flipped on its head where we want the taxable income as low as possible as opposed to normally when we want the net income as high as possible, which means when talking about the income line up top, the question is, is this something that is income? If it is income, do I have to include it or is there some kind of exemption for it? So this time we're going to be talking about capital gains and capital gains get a little bit tricky as well because we have the calculation of the income up top and then we also might have this concept of having different tax rates related to those capital gains which will be applied down here when we do the tax calculation after arriving at the taxable income. Remember that actually calculating the tax is quite complex because we have a progressive tax system already, which means that the one taxable income number might be calculated using multiple different rates and now we're going to add a level of complexity possibly and that we could have different tax rates for capital gains and we may have different tax rates as we saw before for dividends, for example. So quick justification in terms of why that might be, why might we have different tax rate for capital gains? Note what capital gains are. These are typically gains for most people we're thinking about gains from the stock trades for example. We're holding onto investments, stocks and bonds and then hopefully those stocks and bonds will accumulate upward in value over time if we want to realize and spend the money with regards to those stocks and bonds we sell the stocks and bonds and at that point in time that's when we quote realize and quote the gains. Suddenly I have an opinion about the capital gains tax. So the gains can accumulate upwards in other words the value of the stocks can go up in value but we don't generally have a taxable event related to those investments other than possibly with regards to dividends and interest but not with the increase in the value, the capital value of the investment until the point in time we sell it and the justification for that is that the stock market will fluctuate up and down so it would be kind of a chaotic situation for us to try to realize gains and losses without having actually sold the stock. So then when we actually sell the investment we're going to take the sales price minus the cost account for any kind of cost of the trades that took place as well to get to the gain. Now the issue with the gains that we have then is why wouldn't the gains just be in ordinary income? Couple justifications for that one would be that these gains actually accumulated over a long period of time possibly because if they're long term gains they're going to happen over at least a year longer than that often times people are holding onto the stocks for a long time if you're a long term investor and therefore you might have this situation where you sold something accumulated revenue over 10 years and you're accounting for it in one year you have the similar situation with our progressive tax system as though that situation where you have the lottery choice should I take the lottery money today or should I take it over installments over so many years into the future the tax consequence of taking it today would mean that that lump sum will increase your taxable income to the point where the progressive tax tables for ordinary income would be much higher and so that can kind of distort things same kind of thing happens here if I take 10 years worth of gains and realize them at one time you might argue that you have an unreasonably high tax rate that might be applied because you didn't really get all that money now you invested to get the money that's one argument another argument is just simply that you want to incentivize investments in the stock market stock market guy and to do that that incentivizes people to save which is usually good it's good to save for retirement and we want to of course stimulate the economy and whatnot and therefore that's another argument to try to lower the costs of investing our money in stocks and bonds some people are skeptical of that argument thinking that's what the stock traders obviously might like that type of argument but those are the arguments from a tax perspective that result in us having this more complex situation of having to realize the gain and also deal with the tax consequences now also just realize that you could have losses so it gets actually quite complex if you have gains and losses short term gains and long term gains we might dive into that topic a little bit more in and of itself later but for right now we just want to think about the idea if it's going to pull into the first page of the form 1040 if we have these capital gains also realize if you sell other things like property and whatnot you might end up with a similar situation of a capital gain that will be reported on a schedule D it's just that the most common thing that people think of with a schedule D capital gains are investments in stocks and bonds also just realize that most people have their investments in stocks and bonds under the umbrella of a retirement account like a 401k plan or an IRA situation where they might be earning their increase in the value of the stocks and bonds just like if it was outside of an IRA or 401k and they might be earning dividends and income but those are going to usually be going back into the account and they're not actually pulling money out of that account until the point in time that they retire because that's the point of putting them into the 401k plan if you pull the money out before that point then you could get hit with the penalties and interest so that means when you pull the money out then it's usually going to be included as a distribution at retirement age and that usually is included as kind of like income but if you're putting money into the stock market outside of a retirement plan which is often good if you have the money to do that over and above what you're putting into the retirement plan because then you have kind of a nest egg or something that you can dip into at least in the medium term it's not the emergency money but it's money that you can access fairly quickly by selling stocks and bonds that isn't under the umbrella of an IRA or 401k plan and when you sell that stuff that's when you would have a capital gain situation obviously if you do taxes you will also run into some people that just like day trading they're going to try to get value from a short-term investments in which case the Schedule D can be quite extensive and problematic for most people they don't do the day trading they're long-term investors and they work somewhere else and therefore the Schedule D is usually not that burdensome and most of their investments like I say are under the umbrella of a 401k or an IRA which means it's going to be accounted for a little bit differently in terms of the distributions at retirement okay so it's going to be here on line 7 there's the capital gain attached Schedule D here's a quick look at the Schedule D the general ideas that we've got the proceeds the cost and then adjustments and then the gains and losses note that the short-term gains and those long-term gains I'm not going to dive into that in too much detail here we might go into it in more detail later I just want to touch on it as something included in income, another type of income now normally you will get a Schedule A form 1099B from your financial institution your bank or your E-Trade or your Vanguard whoever you are investing with that also might give you a 1099B for interest and dividends and so on so it might not look exactly like this but it will say 1099B on it somewhere and it'll have the related boxes that are going to be necessary in order to do the calculation so note that what you need to calculate is you need the date acquired because you got to see if it's short-term or long-term and the date sold oftentimes these two things are summarized on the 1099 and then there's more detail in the full 1099 report because you might have bought and sold multiple stocks and bonds for example and the main thing that has a consequence on your taxes is short-term versus long-term so for example if you sold like 100 if you sold one stock then it's pretty straightforward on the short-term and long-term at one time not a problem but if you're dealing with a day trader that sold like hundreds of shares then the major thing that you need to be grouping together is the fact that these group of shares were sold under a year and these groups of shares were sold over a year which you might summarize in your data input in the tax software and possibly then use the schedule provided to you by the financial institution as backup and attach that to your tax return instead of entering every single trade that happened so there might be some shortcuts in the data input for that kind of tedious process when you have a whole bunch of trades so just to kind of keep that in mind also just note that it used to be that the date acquired and the cost are usually the most problematic things to come by from the investments and it used to be that the financial institutions remember they're just kind of facilitating your trades so they used to be that you're the one that's ultimately responsible for that information and it used to be the financial institutions finest financial institution this side of Missouri weren't held as closely responsible for that stuff but more and more they've been trying to pressure the financial institutions like with every kind of area which does make it easier on a tax preparer like me to get them to give you the date acquired as well as the cost now the cost gets quite complex because you might have a stock that was for example inherited to you or the stock might have had stock splits from multiple different companies or the stock has changed so the cost can actually get quite cumbersome quite complicated and sometimes the financial institution may not give it to you or they might say this is like what we guessed the cost is or something and you might have to go through some kind of estimate to kind of figure what the cost is so that gets a little bit messy but those are the main three boxes that we need and we might enter them like I say one by one transaction into the system or try to summarize the short term and long term transactions and then provide the detail to the IRS and then you got a crude market discount wash sale short term gain or loss long term gain or loss and so short term and long term will have differences in taxes in terms of generally whether it's going to be subject to ordinary income which is not tax rates that is or is it going to be subject to capital gains rates typically favorable rates so check collectibles if they're collectibles or not now you could have withholdings from your stock sales most of the time most people don't because they're withholding through their W-2s or their distributions if they're in retirement from their pension plans so you don't see that all the time but it's possible because you do have a gain situation possibly that someone withholds the tax and if you sell a whole bunch of stocks then quite likely you might want to withhold if you can at that point there or make an estimated payment when you pull the money out a lot of times people pull money out and they don't really take into consideration the tax consequences in part because they've been taken out of the system of actually thinking about taxes because the IRS has forced the employer to take that role that means that we really get paid sometimes whatever we get paid after taxes and we just think whatever and then when we do something that has a tax trigger and event we don't even think about taxes because we feel like didn't the employer take care of that well no it's your financial institution the employer is not involved but in any case reports to the IRS gross proceeds versus net proceeds check if loss is not allowed profit or loss realized unrealized profit and so on so those are the main boxes line 7 capital gain or loss if you sold a capital asset such as a stock or bonds you must complete and attach form 8, 9, 4, 9 and schedule D so these are going to be the tax rates remember that we have a progressive tax system and we have normal or ordinary tax rates and for the reasons discussed before the capital rates might have a beneficiary rate if you qualify for them by having like the long term capital gains as opposed to the short term capital gains now how are they going to then dish out or serve up those more beneficial rates when we have a progressive tax system and everybody is not already taxed at one rate because it will mean that higher income individuals will have a more favorable rate which will still be like 20% whereas lower income individuals the more favorable rate may bring the capital gains rate down to 0 therefore we have a structure where we're going to be applying the progressive tax tables to ordinary income separating the capital gains to the capital gains subject to a favorable rate and then determining which of these favorable rates would apply based on their income level and doing that calculation noting that on the tax software you're not really going to see all that happening usually because we often rely on the software to do that calculation of the actual tax therefore we often recalculate with our tax worksheet for example the taxable income rely on the worksheet on the software often times to apply the complicated table structure of the progressive tax system and break out these separate taxes favorable taxes for capital gains and possibly qualify dividends for example so if single an income 0 to 41 675 0% up to 15% if it's 41 676 2 459 750 and up to 20% if it's 459 751 so the general concept you would be explaining to someone then if they were asking about the capital gains is that if you have the long term capital gains you might have a favorable taxable gain rate no matter what your income is for incomes that are lower income levels then the favorable rate would be 0 if you're at a mid or moderate range would be 15% for many people probably most people and then if it's a high income level then the favorable rate would be at 20% because the marginal rate of those individuals would be higher than that due to their progressive tax system and the income level they are at exception one you don't have to file form 8949 or schedule D if you aren't deferring any capital gain by investing in a qualified opportunity fund and both of the following apply one you have no capital losses and your only capital gains are capital gain distributions from forms 1099 div box 2a or substitute statements and two none of the form 1099 div or substitute statements have an amount in box 2b unrecaptured section 1250 gain box 2c section 1202 gain or box 2d collectibles 28% gain so the general concept here when you're doing your data input would be if you have the 1099b that reports the sale of stock and that usually is reflecting someone actually the taxpayer actually selling the stock then that will be provided and you're going to have to look up the sales price and then subtract out the cost to figure the gain say a schedule D however as we saw when we looked at the interest and dividends the 1099 div in particular when you have distributions from the corporation those are going to be a different kind of income so if you're investing in stocks for example or bonds if you're investing in stocks and bonds you might have income related to interest which would be bonds typically paying out interest for example or you might have dividends which would be the company distributing out the retained earnings of the company in the form of dividends to the owner of the company that being the shareholders or you could have capital gains which is our focus here which typically is triggered only when the actual stocks are sold the gains then being realized at that point in time now sometimes when you have a distribution from the company so the board of directors or whatever decides to give out money to the shareholders it might dip into not just the retained earnings but also into maybe like the original investment from the distribution of the of the original stocks and in that case they might have to classify it not as a dividend but rather as a capital gain and instead of giving a 1099 B for that transaction because you didn't facilitate the transaction you didn't decide to sell the stock they decided to give a distribution and so it was an involuntary kind of transaction on your end you own the stock you vote for the board of directors but they then decide what the dividend distributions will be and so on then it's going to be reported on the schedule 1099 DIV generally so then you would just record it from the data input standpoint as capital gains with a 1099 DIV and you may not need to generate then a schedule D the software doing that the software might not populate a schedule D unless you have these other boxes 1250 gain and so on so the thing you need to know logistically is if you get a 1099 DIV and you have something in the box for capital gains then you're just going to plug that into the box in your tax software and it will typically then calculate it as as capital gains and may or may not generate a schedule D depending on the needs and then you can basically want to deconstruct that say well why does that make sense and when you talk to someone like a client be able to explain the difference between a dividend which has ordinary versus qualified dividends the qualified dividends might have favorable tax treatment and the distributions of a capital gain which might mean that they distributed something over and above the retained earnings therefore classified it as capital gains instead of normal distributions and you might have capital gains rules which once again you could have favorable tax treatment on on those distributions and then when you sell stock that's when you're going to have the 1099 B which will give you the the sale price of the stock when the person actually physically sold the stock okay exception two so you must file schedule D generally don't have to file form 8 9 4 9 if exception 1 doesn't apply you aren't deferring any capital gain by investing in a qualified opportunity fund or terminating deferral from an investment in a qualified opportunity fund or your only capital gains and losses are capital gain distributions a capital loss carryover from 2021 a gain from form 2439 or 6252 or part 2 of form 4797 a gain or loss from form 4684 6781 or 8 824 a gain or loss from a partnership S corporation a state or trust or gains or losses from transactions for which you received a form 1099 B or substitute statement that shows basis was reported to the IRS the QOF box 3 isn't checked and you don't need to make any distributions in column G of form 8 9 4 9 or enter any codes in column F of form 8 9 4 9 okay so again we got a couple different kind of exceptions here and you've got some similar rules with some of these other forms so for example a gain or loss from a partnership S corporation a state or trust then that might flow through for example with a K1 form these are pass through type of entities so it'll be kind of similar situation to the 1099 D situation where the K1 might indicate that there was a sale of stocks or bonds or whatever made by the partnership or S corporation or a state or trust and then again you're going to populate that into the schedule K area which which hopefully will help to calculate whether or not it's capital gains or ordinary income due to the information on the schedule K and then the salt will help you to determine if you need to populate a schedule D or not with that but you need similar kind of thought process and scenario so if exception 1 applies enter your total capital gain distribution from box 2a of forms 1099 D on line 7 and check the box on that line if you're received capital gain distributions as a nominee that is they were paid to you but actually belong to someone else report on line 7 only amount that belongs to you including a statement showing the full amount you received and the amount you received as a nominee so in other words the money is someone else's but you got the 1099 for whatever reason which would be kind of an unusual situation you have that similar situation we've seen in the past where you really want to kind of tell the IRS yes I'm recognizing that I got the 1099 but I'm trying to show you here in the statement that it's not really something I should be recording in income so see sub schedule B instructions for filing requirements for form 1099 div and 1060 1096 we talked about the 1099 div in a prior presentation tip if you don't have to file schedule D use the qualified dividends and capital gains tax worksheet in the line 16 instructions I think you're your tax