Capital Gains
Gains from the sale of capital assets, taxed at favorable rates if held long enough.
REG loves to bury the rate in a netting question: it hands you a mix of transactions and forces the order—short-term nets against short-term, long-term against long-term, then leftover loss in one bucket offsets net gain in the other. The “tell” is a net long-term gain paired with a net short-term loss; the answer hinges on cross-netting before applying the preferential 0/15/20% brackets. Watch the carve-outs: collectibles cap at a 28% maximum, unrecaptured §1250 gain at a 25% maximum, and high earners owe the extra 3.8% net investment income tax. If a net loss results, only $3,000 ($1,500 MFS) deducts against ordinary income; the rest carries forward indefinitely.
The classic trap is treating §1245 depreciation recapture as capital gain—it is ordinary income, never the preferential rate. Don’t confuse character with holding period: replacement property from a like-kind exchange (real property only since 2018; older banks may still show personal-property swaps) tacks on the relinquished property’s holding period, often making a quick resale long-term.
Hook: gains net like with like, then leftover losses cross over.
PlayPrepHQ study notes are written and reviewed against primary exam sources. How we create & review content →