CAPITAL GAINS AND LOSSES

In the interpretation of historical data for capital gains and losses a survey of the income tax provisions affecting the gains and losses resulting from sales and exchanges of capital assets, together_with the method of tabulating these data, will be helpful. Table D, on pages 444-445, presents a résumé of the changes in tax laws pertaining to gains and losses on sales of capital assets, and, in basic table 15 which shows sources of income and deductions, the amounts of net gain and net loss from sales of capital assets are tabulated as presented in previous reports.

The revenue acts in effect from January 1, 1922, through December 31, 1933, provide for the special taxation of the net gain resulting from sales or exchanges of capital assets, and the revenue acts in effect from January 1, 1924, through December 31, 1933, provide for a tax credit on account of the net loss resulting from sales or exchanges of such capital assets. Under these acts, the term "Capital assets" means property held by the taxpayer for more than 2 years (whether or not connected with his trade or business), but does not mean (1) for any year, stock in trade or other property which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; (2) for the years 1922-1923, property held for personal use; or (3) beginning January 1, 1924, property held primarily for sale in the course of trade or business.

In presenting these data in Statistics of Income, "Capital net gain" is tabulated as such and included in "Total income" and "Net income" for returns with net income for the years 1922-1933. "Capital net gain" for returns with no net income is tabulated as such for the years 1928 and 1929, is included in "Profit from sales of real estate, stocks, bonds, etc.," for 1930-1933, and is included in "Total income" and "Deficit" for the entire period 1928-1933.

"Capital net loss" for which a tax credit of 12% percent is taken is not tabulated and is not taken into account in computing "Total deductions" or "Net income" for 1924-1933. "Capital net loss" when reported by the taxpayer as a deduction (a) in computing "Net income" is included in "Other deductions" for 1924-1928, and in "Net loss from sales of real estate, stocks, bonds, etc.," for 1929-1933, and (b) in computing "Deficit" is included in "Other deductions" for 1928 and in "Net loss from sales of real estate, stocks, bonds, etc.," for 1929-1933. "Capital net loss" not taken into account by the taxpayer as a deduction in computing "Net income," and for which no tax credit of 121⁄2 percent is taken, is not included in "Total deductions" for 1924-1933; and "Capital net loss" not taken into account in computing "Deficit" is not included in "Total deductions" for 1928-1931, but for 1932 and 1933 is tabulated in "Net loss" from sales of real estate, stocks, bonds, etc., and both "Total deductions" and "Deficit" are adjusted to correspond.

The capital net gain and loss from sales of capital assets prior to 1934 include the taxpayer's pro rata share of capital gain or loss of a partnership in which he is a member and of an estate or trust under which he is a beneficiary, when the tax or the tax credit is computed at 12% percent.

Under the provisions of the Revenue Acts of 1934 and 1936 (in effect January 1, 1934, through December 31, 1937), the definition of capital

held, instead of assets held over 2 years. Certain percentages of the gain or loss recognized upon such sales or exchanges are taken into account in computing net income. These percentages, which vary according to the period for which the assets have been held, are: 100 percent of the gain or loss from sales of capital assets held not over 1 year; 80 percent of the gain or loss from sales of capital assets held over 1 year but not over 2 years; 60 percent of the gain or loss from sales of capital assets held over 2 years but not over 5 years; 40 percent of the gain or loss from sales of capital assets held over 5 years but not over 10 years; and 30 percent of the gain or loss from sales of capital assets held over 10 years. The deduction for net capital loss (that is, after the percentages are applied and after subtracting the capital gains to be taken into account) is limited to $2,000, or the amount of the net capital loss, whichever is smaller. (On joint returns, husband and wife are considered separate taxpayers and allowance of losses from sales of capital assets of one spouse is in all cases to be computed without regard to gains and losses of the other; thus if both have a net loss from such sales, the deduction may range from $2,000 to $4,000.)

The net income reported on individual income tax returns, Form 1040, for the taxable years 1934-1937, and fiduciary income tax returns, Form 1041, for 1937, includes net capital gain or loss computed in accordance with the limitations stated in the preceding paragraph. The net capital gain or loss, as reported for this period, excludes that received through partnerships and fiduciaries. It is not possible, by using the net capital gain and net capital loss on the returns for these years, to adjust the "Total income," "Total deductions," and "Net income" so that they will be comparable with these items as tabulated for prior years. Moreover, net capital gain or loss reported on returns for 1934-1937 is not comparable with "Profit or loss from sale of real estate, stocks, and bonds, etc.," "Capital net gain," or "Capital net loss" reported on returns for prior years.

Under the provisions of the Revenue Act of 1938 and of the Internal Revenue Code as originally enacted, the definition of capital assets is the same as that under the provisions of the Revenue Acts of 1934 and 1936, except that property used in trade or business of a character which is subject to the allowance for depreciation is excluded; and securities (stocks and bonds) which became worthless during the taxable year are considered as loss from sales or exchanges of capital assets. The Revenue Act of 1941, amending the Code, excludes from capital assets an obligation of the United States or any possession thereof, or of a State or Territory or any political subdivision thereof, or the District of Columbia, issued on or after March 1, 1941, on a discount basis and payable without interest at a fixed maturity date not exceeding 1 year from date of issue.

Under the 1938 act, the percentages of the recognized gains or losses from the sales or exchanges of capital assets to be taken into account in computing net income for the years 1938-1941 differ from the percentages of gains or losses from such sales to be taken into account for 1934-1937, and the number of periods of time for which the assets were held are reduced from five to three. The percentages, varying according to the length of time the assets were held, are: 100 percent of the gain or loss from sales of capital assets held 18 months or less;

months but not over 24 months; 50 percent of the gain or loss from sales of capital assets held over 24 months. The net capital gain or loss is separated into short-term and long-term. Net short-term gain or loss is that from the sales or exchanges of capital assets held 18 months or less, and net long-term gain or loss is that from the sales or exchanges of capital assets held over 18 months. Net short-term gain, net long-term gain, and net long-term loss are taken into account in computing current year net income. Net short-term loss, however, is not deductible in computing current year net income.

The net short-term capital loss sustained in any taxable year 19381941, while not deductible from income in the year in which the loss is sustained, may be carried over only to the next succeeding taxable year and treated as a short-term capital loss. The amount carried over cannot exceed the net income for the year in which the loss is sustained, and can be deducted only to the extent of the net short-term capital gain of the year in which the deduction is permitted. The amount of short-term capital loss carried over into 1939-1941, tabulated for Statistics of Income (see page 60), is only the amount used against the current year short-term gains reported on returns showing a net gain from sales of capital assets; amounts of the carry-over in excess of the current year short-term gains having been disregarded. The amounts of carry-over reported on returns showing a net loss from sales of capital assets were not tabulated.

In comparing "Net short-term capital gain included in total income" and "Net income" on returns for the years 1939-1941 with similar items on returns for 1938, it should be noted that the amounts for 1939-1941 are after deduction for net short-term capital loss of preceding taxable year, whereas, in 1938, such a deduction was not allowable. The item "Current year net short-term capital gain" published in Statistics of Income for 1940 and 1941, is comparable with "Net short-term capital gain before deducting prior year net short-term capital loss," published in Statistics of Income for 1939, and with "Net short-term capital gain" published for 1938. The item "Net. short-term capital loss of preceding taxable year deducted," published for 1940 and 1941, is comparable with "Prior year net shortterm capital loss deducted," published for the first time in 1939. Net long-term capital gain and loss for the years 1938-1941 are comparable.

The amounts of "Net short-term capital gain" and "Net long-term capital gain (or loss)" shown on the returns and tabulated for the income years 1938-1941, are not comparable with "Net capital gain (or loss)" for the income years 1934-1937 because, for 1938-1941, the periods of time for which the assets were held and the percentages of recognized gain or loss to be taken into account are changed; worthless stocks and bonds are included; the net short-term loss is disallowed as a deduction in any current year; the net long-term loss is fully deductible; and for the years 1939-1941 the capital loss carry-over is deducted from the short-term capital gain. Moreover, for the years 1938-1941, the net short-term capital gain and net long-term capital gain or loss include the net gain or loss to be taken into account from partnerships and commom trust funds, whereas, for 1934-1937, the net capital gain or loss excludes such gain or loss from partnerships and fiduciaries. It is not possible, by using the "Net short-term capi

"Total income," "Total deductions," and Net income" for the income years 1938-1941 so that they will be comparable with these items for the income years 1934-1937.

The Revenue Act of 1942 excludes real property used in trade or business of the taxpayer from the definition of capital assets; changes the periods of time for which an asset is held in determining short-term and long-term capital gain or loss; and changes the percentages of recognized gain or loss to be taken into account as follows: 100 percent of the gain or loss from sales of capital assets held 6 months or less (short-term) and 50 percent of the gain or loss from sales of capital assets held more than 6 months (long-term). Under this act, a nonbusiness debt which becomes totally worthless within the year is considered a loss from the sale of a capital asset held not more than six months; and certain distributions under employees' trust plans as specified under section 165, to the extent that the distributions exceed the amount contributed by the employee, are considered a gain from the sale of a capital asset held more than 6 months.

Under this act, the short- and long-term capital gains and losses are combined with the capital loss carry-over for the purpose of computing the net gain or loss from sales of capital assets. If the combination results in a net loss, the deduction for the current year is limited to the amount of such loss, or to $1,000, or to the net income (or for 1944 and thereafter, adjusted gross income if taxed under supplement T) computed without regard to capital gains and losses, whichever is smallest; if the combination results in a net gain, the amount thereof is included in income.

Under certain circumstances gain or loss from the sale of property which is not a capital asset may be treated as gain or loss from the sale of a capital asset. Such gain or loss includes that from the sales of land and depreciable property used in business and from the cutting of timber under contract, if held more than 6 months. If the recognized gains upon sales or exchanges of such property plus the recognized gains from compulsory or involuntary conversion (through seizure, condemnation, destruction, fire, or theft) of property used in business and of capital assets held more than 6 months, exceed the recognized losses from such sales, exchanges, and conversions, then such gains and losses are considered as gains and losses from sales of capital assets held more than 6 months. However, if such gains do not exceed such losses, then such gains and losses are not considered as gains or losses from sales of capital assets; but each gain is fully reported and each loss, if allowable at all, is deductible in full.

Under the 1942 act, the capital loss carry-over from 1941 into 1942 is a net short-term capital loss carry-over; it cannot exceed the net income for 1941 and is deductible only to the extent of the net shortterm capital gain for 1942; and it cannot be carried into subsequent years. The net capital loss sustained in 1942 or subsequent years includes both short- and long-term capital losses and may be carried forward as a short-term capital loss in each of five succeeding years to the extent that the net capital loss exceeds the total of any net capital gains of any years intervening between the year in which the net capital loss occurred and the year to which carried. If there are capital loss carry-overs from more than 1 year, they are allowed

means the excess of (1) the current year losses from sales or exchanges of capital assets over (2) the current year gains from such sales or exchanges plus the smaller of $1,000 or net income (or for 1944 and thereafter adjusted gross income if tax is determined from tax table) computed without regard to gains or losses from sales or exchanges of capital assets. For the purpose of computing the capital loss carry-over, "Net capital gain" means the excess of (1) the current year gains from sales or exchanges of capital assets plus the smaller of $1,000 or net income (or for 1944 and thereafter adjusted gross income if tax is determined from tax table) computed without regard to gains and losses from sales or exchanges of capital assets, over (2) the current year losses from such sales or exchanges.

The carry-over reported on the 1942 returns differs from that reported on the 1943-1948 returns. The carry-over reported on the 1942 returns, a 1-year carry-over of the disallowed net short-term capital loss, is limited to the net income for 1941 as well as to the net short-term capital gain of 1942; whereas, the carry-over reported on a return for 1943 through 1948 is the cumulation of disallowed net capital losses sustained in the preceding 5 year period but not prior to January 1, 1942. This carry-over includes both short- and longterm capital losses and is reported to the extent not previously offset by the net capital gain of succeeding years. Thus a carry-over from any year, or any portion thereof not eliminated in the interim may be repeatedly reported in five succeeding years. The capital loss carry-over reported on returns for 1942 through 1948 is tabulated from returns with a net loss from sales of capital assets as well as from returns with a net gain from such sales (see page 60).

The "Net gain from sales of capital assets," reported and tabulated for 1942, is a combination of the net short- and long-term capital gains and losses including the net gain or loss to be taken into account from partnerships and common trust funds; also the net short-term capital loss carried over from 1941, not in excess of the net income for that year, has been deducted but only to the extent of the net short-term gain for 1942. For 1943-1948, the "Net gain from sales of capital assets" is similar to that for 1942, except that the carryover is computed and used as described above.

The allowable deduction of a "Net loss from sales of capital assets" for 1942-1948 is limited to the amount of such loss, or to $1,000, or to the net income (or for 1944 and thereafter, adjusted gross income if tax is determined from tax table) computed without regard to capital gains or losses, whichever is smallest. For 1942, the allowable deduction for a net loss from sales of capital assets consists of the capital loss of that year; but for 1943-1948, the allowable deduction may consist of the carry-over, or the current year capital loss, or partly of the carry-over and partly of the current year capital loss. The net gain or loss from sales of capital assets reported and tabulated for 1942-1948 is not comparable with that from sales of capital assets reported for 1938-1941 because of the changes in the periods of time for which the assets were held; the percentages of gain or loss to be taken into account; the computation of the carry-over; the amount of allowable deduction for capital loss; and because of the combination of net short- and long-term capital gain and loss, all of which affect the data for 1942-1948. It is impossible to adjust "Total income," "Total deductions," or "Net income," for 1942–43,