 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. Not 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 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 oftentimes people are holding on to the stocks for a long time if you're a long-term investor and therefore you might have this situation where you sold something that 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 the costs of investing our money in stocks and bonds. Some people are skeptical of that argument thinking that's what you know the 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 right 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 of 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 count 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 right 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 you know 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 their 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 you know it's going to be accounted for a little a little bit differently in terms of the distributions at retirement okay so it's going to be here on line seven if you have and 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'll will get a schedule a form 1099 B from your financial institution your bank or your each rate or your vanguard whoever you are investing with that also might give you a 1099 B for interest and dividends and so on so it might not look exactly like this but it will say 1099 B 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 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 like one 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 the financial institution as backup and attach that to your tax return instead of entering every single trade that happened