students2009-ch16 Capital Gains - Stakes Gains Losses LTCG...

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Stakes Gains Losses
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LTCG 15% 5% 0%
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LTCL STCL Deduction Limited
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LTCG STCG LTCL STCL
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Why Preferential Treatment?
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Rationale for Favorable Treatment of CG Pro & Con Alleviates tax on inflation-produced gains Bunching of gains leads to higher taxes in a progressive rate system Encourages investment/ stimulates sales World trade demands it • Political: principal way of gaining wealth (before 1987) No real economic difference between ordinary and capital gains Preferential treatment produces administrative complexity Political: wealth redistribution and horizontal equity problems; inequities In combination with other tax provisions, preferential treatment for CG can lead to decisions being made for tax rather than for economic reasons Pro-preferential Treatment Con-preferential Treatment
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9 Requirements for LTCG Treatment 1. Sale or exchange 2. Capital asset 3. Holding period
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10 Requirements for LTCG Treatment Sale or exchange • Exceptions Abandonment (not sale or exchange) Produces ordinary loss, if deductible Worthless stock Treated as a sale on last day of tax year became worthless Cancellation of lease Casualties or thefts of personal use assets, if gain is involved
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