 Income tax 2021-2022, capital gain or loss. Get ready to get refunds to the max diving into income tax 2021-2022. Income tax formula, line one, income. First page of the form 1040, line number seven, capital gain or loss, attached schedule D if required. This is the first part or top portion of the schedule D, capital gains and losses. The capital gains and losses is a huge topic in and of itself. We might dive in in more depth and future presentations for now. We want to give an overview, the most common kind of things you're going to see with regards to the capital gains and losses. What kind of clients would be more likely to have substantial activity with regards to gains and losses. And the idea that it's another kind of income line, a separate schedule that would flow into the first page of the form 1040. If you think about it in terms of an equation, you got the income line, which is being supported by the detail of the schedule D. So if you think about the capital gains and losses, the most common types of capital gains and losses you're going to have are sales of say stocks, for example. And you're typically going to get a 1099B from a broker, which is going to give you the information that you need to fill it out. So oftentimes it's fairly straightforward to do the data input, although there's a lot of complexities with regards to the taxation of the capital gains, which could be different than the ordinary income rates. And there's often issues with the cost or basis, which oftentimes the brokerage firm will give you these days, and they're more and more getting better at being able to at least estimate the cost or basis. But that's often one of the issues that are involved with the schedule D. Now it's far more likely that if you're dealing tax returns for more well-off individuals, they're going to have more stocks and bonds sales. So you might be dealing with more well-off individuals, might be more likely to be buying and selling stocks more rapidly. And so if you're a tax preparer or practitioner, then your thought process, like always, is going to be where is your focus? Are you focusing on types of returns that are typically going to be easier returns, less complex, that you can automate and do more of them at lower profit margins often? Or are you focused in on more higher income tax returns, where you're going to have to do more research? It might take more time to do data input for things like substantial sales of, say, capital gains or stocks and bonds, which you'll have more schedules to deal with, like schedule Ds. And you might have more questions with regards to things like what was the cost or basis of these items that you are selling. So also just realize that the general concept with the schedule D is you've got a short-term and a long-term portion of the possible capital gains. And we can go into detail in terms of why the tax law would be on that, but I won't go into too much detail on that here. Just note that if it's a long-term capital gain, you're more likely to have different and better capital gain rates than if it's short-term. If it's short-term, it's likely that the capital gain rates that you will have will be at ordinary income rates, and that's our normal progressive tax system. If they're long-term capital gains, it's likely that you're going to have more beneficial rates. And some of the reasons for that is because it's trying to incentivize capital investment. And because if you're talking about the income tax rates with a progressive tax system, if you sold like a bunch of stuff in one year that you've been holding on to for like 10 years, then it's likely that you're going to be taxed at a high tax bracket if it was a high-cost thing that you sold when really the appreciation could have happened over 10 years. So the progressive tax system kind of distorts the tax brackets when a sale is made for something that has accumulated in value over a long period of time. So those are just some reasons why people debate as to whether or not the capital gains rates should be different than the ordinary income rates, but obviously that adds a level of complexity to our calculations, which we'll talk a little bit about when we get to the tax formulas. But it's important for the data input then to note whether you're entering it in as a short-term, if it was a short-term sale or a long-term sale, and you'll see that more when we look at the schedules. The general idea is that you're going to have your 1099B from the brokerage firms, and those are going to give you the proceeds what you received. What you received for the sale is easy to know. So we know how much stock we sold, we know what the proceeds were, and the typical example would be stocks. What is often more difficult is the cost, because if you sold a stock, for example, that you held for 10 years, and there were a bunch of stock splits that happened and so on and so forth, then the cost is going to be more difficult. Now the brokerage firms are getting better and better at estimating the cost, giving you the cost so that you can do the data input fairly quickly. Then you would take the proceeds minus the cost, that's going to give you the gain or loss. You also need the dates that would be involved to determine if it's short-term or long-term, and that's going to be the general process. Also just realize that you could have some situations with the data input that you can make it a little bit faster. You might try to group together, like the whole financial, if they have a whole bunch of stock sales that happened. For example, you might try to group together all the stock sales that were short-term and long-term to get the tax effect that was correct and possibly give an attachment to the government with regards to all the details that came from the brokerage firm, instead of doing the data input for line by line for like 400 sales that took place or something like that, just from a logistical data input standpoint. We might talk about that more in the next presentation when we get to the software example. Here's going to be the brokerage form. This is the proceeds broker and barter exchange transactions, the 1099B. It might not look like this if you get it from the broker because they might just give you the boxes that they need, but it'll have the boxes that they need and the relevant names or numbers to the boxes so that you could look them up, the instructions I mean, on the IRS website for the general form 1099B. This would be coming from the financial institutions, the banks or whoever they're trading through or with. So we got the payers TIN, the recipients TIN, the recipients name, the address and so on. The applicable checkbox on form 8449, description of property. So if it was shares, then you can have the shares of the property and then basically the amount that was sold. Now note, this in a normal brokerage kind of situation would have to be summarized possibly on page one and then they're going to give you another page that's going to show you all the transactions that might show you the detail of what is happening. So the total proceeds will be on the first page. The detail that you'll have to get to some degree will be typically on the latter pages. Acquired, dates sold, these are going to be very important because that'll help us to determine if it's short term or long term which could have a tax implication. Now again, normally the brokerage accounts are going to have the summary of this information on page one and then you're going to have to go into the detail which they will typically break out the transactions that were short term and long term possibly in the detail to the reports. So then we got the proceeds, how much we sold it for and the cost or basis. So again, this would basically be on page one, the summary of all the stocks and bonds that were sold and the summary of the cost, if they can get that summary which they might say, hey I don't know exactly what the cost is, this is our projection of what the cost is which they might give you on the detail on the following pages of all the stock sales. And then we got the accrued market discount, if applicable. This up to one E or the common kind of boxes we would expect, wash sale loss, disallowance, short term gain or loss, long term gain or loss and then check if proceeds from collectibles. So there might be a difference if it's collectibles, QOF, federal income tax withheld. So if there were any withholdings which is possible because if you sold a whole lot of stocks and bonds then you might have some withholdings. Check if non-covered security, report to IRS gross proceeds, net proceeds and check if the loss is not based on amount in 1D. Profit or loss realized in 2022 on closed contracts. Unrealized profit or loss on open contracts. Unrealized profit or loss on open contracts. Now notice if there's anything which is less likely on these items down below then you can always look at the instructions to help you to determine what to do and you can use the software hopefully they'll help you with the data input possibly giving you the data input by box which will help you to do the data input and then you can kind of reverse engineer what the software did to see if it makes sense so you could explain it to yourself and to the client. Also just realize that many people, not just well off people have investments in stocks and bonds but most people often have their investments in stocks and bonds under the umbrella of like a under the umbrella of a 401k or IRA type of plan and so there might not be as much activity that is being happening at least during the working years during that point in time and you can have a difference in terms of the impact during that point in time so that's another reason just why you might not get as much in terms of the 1099B sales for most people and if you go over a certain threshold then it's more likely that you've got people buying and selling stocks possibly that are outside of the umbrella of say a 401k or an IRA type of account okay capital gain or loss if you sold a capital asset such as a stock or bond you must complete and attach form 8-9-4-9 and schedule D exception one you don't have to file form 8-9-4-9 or schedule D if you aren't deferring any capital gain by investing in a qualified opportunity zone fund and both of the following apply one you have no capital losses and your only capital gains are capital gain distributions from forms 1099Div box 2A or substitute statements and two none of the forms 1099Div or substitute statements have an amount in box 2B unrecaptured section 1250 gain box 2C section 1202 gain or box 2D collectibles 28% gain exception two you must file schedule D but generally don't have to file form 8-9-4-9 if exception one doesn't apply you aren't deferring any capital gain by investing in a qualified opportunity zone fund or terminating deferral from an investment in a qualified opportunity zone and your only capital gains and losses are capital gains distributions capital A capital loss carryover from 2020 there's also a carryover component if you have the losses so just note if there's a loss you sold something at a loss meaning you sold it and you paid more for it than you sold it for so you bought the stock at a higher price than you sold it for you have a loss now that's when a lot of the complexity comes in in terms of how the government's going to deal with the loss because the government you have an income tax so notice if you have an income tax the government wants to take a portion of your income but what if I lost money the government doesn't want to be on the hook for lost money they don't want to pay us for bad investments so when there's a loss the government's going to be skeptical of that so the question with a loss is can I take that loss against other income and that's when some of the confusion often comes into play especially since the capital gains could be taxed at different tax rates than the ordinary income so now the question is well what if there's a capital loss do I get to match out the capital loss against W-2 income which is that ordinary income rates normally now I have this loss which would have been taxed at capital gains rates and so that introduces a whole host of interesting scenarios that I won't get into in detail here but a gain from Form 2439 or 6252 or Part 1 of Form 4797 a gain or loss from Form 4684, 6781 or 8824 a gain or loss from a partnership S-Corporation, Estate or Trust or gains and losses from transactions for which you received a Form 1099B or substitute statement that shows basis was reported to the IRS the QOF box in box 3 isn't checked and you don't need to make any adjustments in columns G of Form 8449 or enter any codes in column F of Form 8449 if exception 1 applies enter your total capital gain distributions from box 2A of Forms 1099DIV on line 7 and check the box on that line so obviously those exceptions are getting into kind of the weeds here we'll get into the general scenario when we get into the tax software problems we can just take a look at that Schedule D obviously if you have more questions about capital gains in general the place to go is the instructions for the Schedule D that's a good starting place that you can kind of review and then go on from there to expand your research