 Hello, this is Professor Farhad. In this session, we would look at the netting process of capital gains slash losses. This topic is covered in an income tax course, the CPA exam regulation very heavily. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, tax and finance lectures. This is a list of all my courses. If you like my sessions, please like them, share them, subscribe. It doesn't cost you anything. If they benefit you, it means they may benefit other people, share the wealth, connect with me on Instagram. And on my website, you will find additional resources to supplement your accounting education or pass your CPA exam. So one of my subscribers sent me this question and he wanted to know what will be the reported net gain slash loss and what applicable tax rate. So this taxpayer, it's a CPA question and he sent me this question. They have a capital loss of 70, long-term capital gain, collectible gains and long-term gain. So before I answer this question, let's do a quick review on how to figure out what's the net gain or net loss because we have a lot of categories of gains and losses. So how do we net them out? Well, let's take a look at what we have here. We have basically four categories. We could have long-term capital gain for collectible, which are at 28%. We could have long-term capital loss for collectible at 28%. So what we do first, we net those two categories. If you have a gains and losses, you net them and you might either have a gain or a loss. You net them out. Then you have the long-term non-collectible, which are capital gain, which are taxed at zero, 15 and 20, depending on your tax rate, you have the gains and you have the losses. You have the gains and you have the losses. Then you net those categories out together and you'll either have a gain or a loss. Not both, you'd either have a gain or a loss. Not both, okay? I put gain or a loss because you could have a gain, you could have a loss, but not both after you net them out. And you could have unrecaptured section 1250 long-term capital gain and unrecaptured section 1250 long-term capital loss. What do you do with those, you net them out. And you'll either have a plus or a minus. Now, those three categories, those three categories are considered long-term. Then we have the short-term. We could have short-term capital gains, which is a plus. We could have a short-term capital loss, which is a minus. You net them out. And what you have is either a plus or a minus. Okay, so either a gain or a loss. So the first thing you do in this process, you net all these out. You might have a plus here, minus here, plus here. Well, you net them out. You net them out against each other. Or you could have a minus, a plus, and a plus. It doesn't matter. You keep on netting them out until you either have a plus or a minus. Then whatever you have in this category, you net it against this category. So think about it, short-term capital gain and losses are at the end, okay? Now, how do you net them out? The good thing about the netting process, the IRS and Congress is unusually, unusually not forgiven, unusually generous in this process. So I want you to take the maximum advantage of your capital losses. So how does that work? Let's take a look at some examples and we will revisit that question that I just started with on the CPA exam. So let's assume you have a short-term capital, a short-term, you have a gain, you have a loss. And under the long-term capital gain and losses, you have a gain under the 28%, a loss under the 20%. You don't have anything for section 25 and you have 3000 gains under the 0, 15 and 20%. So what do you do first? You net each category by itself. So here if we have for short-term, we have plus 13 minus two, we have a net of 11. Here we have plus 12 minus 20, we have minus eight and 3000. Now the next step what you do is you net those two out because they are long-term. Well, guess what? I have a gain of 3000, this 8,000 will net it out. It's gonna reduce my loss to 5,000. It's gonna eliminate my gain. I want to eliminate my gain. Therefore what I did, this gain went here, produced the losses to 5,000 and this category is gone. So this category is gone, this category is gone. Now I have a loss of five and a gain of 11. Now I move into my, now I move my long-term capital loss to reduce my short-term capital gain. Simply put, I'm gonna have remaining net short-term capital gain of 6,000. Okay, let's look at another example. Short-term, I have 3000 plus, 5,000 minus, 28% category, 15 plus losses of seven, the 25% 4,000, 3000 gains minus 8,000 losses, zero, 15 and 20. First, I net each category separately. So under the short-term capital gain, I have a loss of two, a gain of eight under the 28%, a gain and a loss. So the first thing I work in this category now, long-term, what do I have? Well, I have losses and what's gonna happen with the losses, I could use my losses to reduce my gain. Which gain do I reduce? I reduce my highest gain. My highest gain is 28% tax rate. So I'm gonna use this loss to reduce my gain down to 3,000. Okay, so what I do is I reduce, I'll take this 5,000, reduce my gain. Now I have a gain of three and this gain of four doesn't go away. So I have a gain of three, a gain of four. Now what's gonna happen? I have short-term capital loss of 2,000. Now, in your opinion, what's the most advantageous to use this loss against the 3,000 or to use it against the 4,000? I hope you know that I'm better off using it to reduce the 3,000 because the 3,000 is taxed at 28%. And this is how I use it. I take this 2,000, reduce my 3,000 and I'm down to 1,000 taxed at 28%, 4,000 taxed at 25% percent. Let's take a look at this example as well. I have a short-term capital gain of three, short-term, long-term capital gain at 28% for 1,000 and I have 0,15 and 20 again and a loss. So first thing, I net each category. So this is 3,000 and here I have 5,000 losses. What do I do with these losses? First, I'm working with this long-term arena. I'm gonna take this 1,000 and it's gonna be offset. I'm gonna be left with 4,000 of losses, 3,000 of gains. Guess what? This 4,000 of losses would reduce my gains to zero and I will have remaining 1,000 of long-term capital losses. So hopefully this makes sense. Now we're gonna look at this question. It's gonna look very, very easy at this point. Let's take a look at this question. So what do I have here? I have short-term capital loss, which is they net it out for us of 7,000. At 25%, I have long-term capital gain of 56,000. Yeah, this is a gain. Let's make, this is not 7,000. This is 70,000, it's a loss. I have a gain and I have at 28%. I have a gain of long-term, net long-term capital gain of 28%. So basically, they did the netting for us. So we don't have to do that first step. They did the netting and at 15%, we have also a gain, long-term capital gain at 20%. So here's what's gonna happen. I have the losses. What is the most advantageous thing for me to do? The most advantageous thing for me, they're all gains. So you cannot net them against each other. This is a gain, this is a gain, this is a gain. So you cannot net them. You have to keep them separate, okay? You only net the opposite. Here we have a loss. So I'm gonna take this loss. How am I gonna use this loss? Well, again, the Congress is pretty generous. I'm gonna use this loss first. I'm gonna start with 70,000 and reduce my this 28% because this is, I'm gonna be taxed on it the most. I'm gonna be left with 60,000 of losses. So this is gone. So what do I do next? Do I take out the 15 or do I take out the 25? Obviously I'll take out the 25, which is 56,000. I reduce this 60,000 losses. I reduce it by additional gain of 56,000. What I'm left is 4,000 of losses. Now basically I no longer have to pay taxes on this 56,000 of gain. I still have 4,000 of losses. If I have 4,000 of losses, I'm gonna offset only 4,000 of long-term capital gain and what's left is zero losses. And if I take out of these gains, if I reduce them by four, I will have 16,000. So I have 16,000 long-term capital gain taxed at 15. Let's see which the answer. The answer is A, 16,000 of long-term capital gain taxed at 15. As always, if you like this recording, please don't hesitate to like the recording, share it, put it in playlist and don't forget. On my website, I do have additional resources if you're studying for your CPA exam. And basically this question came from one of my subscribers. He asked this question. I guess it's one of, this is not my question, but he asked about it. He put it on one of my discussion board. So I looked at it for him. If you have any questions, any comments, let me know about this question specifically. Study hard, CPA is worth it. Invest that extra money if you want to subscribe because it's a long-term investment. So since we're talking about long-term, your CPA exam is a long-term investment. Don't shortchange yourself and stay safe during those coronavirus days.