Explain Capital Gain/ Loss as though I'm 3
September 27, 2013 12:46 PM Subscribe
Great Aunt Sue gives me a ring. She doesn't wear it because it was given to her by an ex many moons ago, so she doesn't care what I do with it either. I don't like it, so I decide to sell it. It is vintage and very valuable. Turns out it is worth 20K fair market. I sell it for just that to an individual. How does that work as far as capital gains/ loss go? Is it considered a gift or income? Does it get reported, do I report it, do they, should she have for giving away the jewelry, does the bank flag the deposit and report it? No clue. Everything I have read is in regards to stocks, real estate, or inherited stuff. Can you explain this to me?
This is all hypothetical, I'm just curious, so please don't send me off to an accountant/ lawyer/ taxman.
The IRS considers jewelry to be a capital asset. So, it will be reportable as capital gains income.
Since this was a gift to you, the basis value of the ring is what Aunt Sue (or her ex) paid for it. (FMV would come into play if you have inherited it). So, if Aunt Sue's ex paid $15k and you sold the ring for $20k, your capital gain would be $5k. The tax would be 28%, or $1,400, in most cases - there can be slight variations depending on how long you had the ring, but that is likely too detailed for your hypothetical.
posted by Tanizaki at 12:57 PM on September 27, 2013 [2 favorites]
Since this was a gift to you, the basis value of the ring is what Aunt Sue (or her ex) paid for it. (FMV would come into play if you have inherited it). So, if Aunt Sue's ex paid $15k and you sold the ring for $20k, your capital gain would be $5k. The tax would be 28%, or $1,400, in most cases - there can be slight variations depending on how long you had the ring, but that is likely too detailed for your hypothetical.
posted by Tanizaki at 12:57 PM on September 27, 2013 [2 favorites]
Tanizaki is basically correct, with some minor details that could be adjusted depending on the circumstances. Was a gift tax paid on the ring? If so, you need to adjust the basis. How long have you had the ring before you sell it? Is the ring considered a collectable by the IRS? If it's considered a collectable, the distinction between short-term capital gain and long-term capital gain doesn't matter, it'll generally be taxed at 28%.
Take a look at the IRS publications on this topic and the publication on capital gains.
posted by Arbac at 1:07 PM on September 27, 2013
Take a look at the IRS publications on this topic and the publication on capital gains.
posted by Arbac at 1:07 PM on September 27, 2013
Am I really that ignorant? I was thinking you shouldn't have to claim it. Otherwise I'd have to claim every gift I ever received.
posted by St. Peepsburg at 1:13 PM on September 27, 2013
posted by St. Peepsburg at 1:13 PM on September 27, 2013
Otherwise I'd have to claim every gift I ever received.
No, because the income being discussed here is a capital gain. Presumably, you don't sell every gift you've ever received, and not every gift you receive is necessarily going to be a capital asset to begin with.
Of course, as usual with these issue, it depends.
posted by Tanizaki at 1:16 PM on September 27, 2013 [1 favorite]
No, because the income being discussed here is a capital gain. Presumably, you don't sell every gift you've ever received, and not every gift you receive is necessarily going to be a capital asset to begin with.
Of course, as usual with these issue, it depends.
posted by Tanizaki at 1:16 PM on September 27, 2013 [1 favorite]
Response by poster: What if she passed away right after giving it to me so there would be no way to know how much it was purchased for. What if I picked it out of her stash after she passed away and the estate was 'closed'. As in she left all her jewels to my uncle, who let me pick through the 'leftovers'.
Is this not even a capital gain/ loss scenario? Maybe this is why I'm having a hard time wrapping my head around it.
posted by MayNicholas at 1:21 PM on September 27, 2013
Is this not even a capital gain/ loss scenario? Maybe this is why I'm having a hard time wrapping my head around it.
posted by MayNicholas at 1:21 PM on September 27, 2013
Here's the IRS gift-tax FAQ, which doesn't exactly answer your questions, but may be illuminating.
As far as paying tax on every gift one received, you can gift up to a certain threshold to the same person without paying taxes. Currently it is $14K, but it has been adjusted by a thousand bucks here and there by the winds of tax policy.
posted by Sunburnt at 1:25 PM on September 27, 2013
As far as paying tax on every gift one received, you can gift up to a certain threshold to the same person without paying taxes. Currently it is $14K, but it has been adjusted by a thousand bucks here and there by the winds of tax policy.
posted by Sunburnt at 1:25 PM on September 27, 2013
What if she passed away right after giving it to me so there would be no way to know how much it was purchased for.
You have to prove basis if you're audited, so if you don't know the basis the most conservative thing is to say basis is zero and report the entire sales price as gain.
What if I picked it out of her stash after she passed away and the estate was 'closed'. As in she left all her jewels to my uncle, who let me pick through the 'leftovers'.
We give assets a "step up" in basis when they are inherited (as opposed to gifted during lifetime), so the cost basis in that scenario would be the FMV of the ring on the date of Aunt's death.
posted by jpe at 1:42 PM on September 27, 2013 [2 favorites]
You have to prove basis if you're audited, so if you don't know the basis the most conservative thing is to say basis is zero and report the entire sales price as gain.
What if I picked it out of her stash after she passed away and the estate was 'closed'. As in she left all her jewels to my uncle, who let me pick through the 'leftovers'.
We give assets a "step up" in basis when they are inherited (as opposed to gifted during lifetime), so the cost basis in that scenario would be the FMV of the ring on the date of Aunt's death.
posted by jpe at 1:42 PM on September 27, 2013 [2 favorites]
Is this not even a capital gain/ loss scenario?
It's definitely a capital gain question. The IRS does not have a procedure where you don't know basis, and you can find cases where this is the exact issue in question (e.g., Jones, 24 TC 525 (1955)). It would be something to discuss with your accountant. Accountants (and other persons treated as "tax return preparers" under the Code) have liability for what appears on the return, so you may find that they won't just accept your made up number). Honestly, if they did accept your made up number, I'd think they're shady.
Also, keep in mind that the Code does not take into account inflation, so if Aunt bought the ring for $7,000 in 1980 and it was sold for $20,000 in 2013, gain would be due on the nominal change in value, even though the "appreciation" from $7K to $20K might be solely due to inflation, and not change in actual value.
Otherwise I'd have to claim every gift I ever received.
The issue is whether the gift was over the annual giving limit. In 2013, it's $14,000, person to person. So a married couple can, combined, give $28,000 to any single individual, or $56K to another married couple, etc. The limit changes annually. The hypothetical in this case is $20,000, which is over the limit, so gift tax would apply.
Some people (let's call them practitioners of tax fraud) don't pay the gift tax, or inflate their basis on gifts, or don't report their capital gains on private sales transactions, and when then get caught, they have an exciting opportunity to be 1) prosecuted for tax evasion and 2) owe significant interest and penalties. I'd hasten to add, though, that the IRS has excellent customer service and should anyone have questions about the application of the law to their facts, they should give them a call.
This is not tax or legal advice, and I am not your tax or legal advisor. Consult an attorney and accountant.
posted by Admiral Haddock at 2:00 PM on September 27, 2013 [2 favorites]
It's definitely a capital gain question. The IRS does not have a procedure where you don't know basis, and you can find cases where this is the exact issue in question (e.g., Jones, 24 TC 525 (1955)). It would be something to discuss with your accountant. Accountants (and other persons treated as "tax return preparers" under the Code) have liability for what appears on the return, so you may find that they won't just accept your made up number). Honestly, if they did accept your made up number, I'd think they're shady.
Also, keep in mind that the Code does not take into account inflation, so if Aunt bought the ring for $7,000 in 1980 and it was sold for $20,000 in 2013, gain would be due on the nominal change in value, even though the "appreciation" from $7K to $20K might be solely due to inflation, and not change in actual value.
Otherwise I'd have to claim every gift I ever received.
The issue is whether the gift was over the annual giving limit. In 2013, it's $14,000, person to person. So a married couple can, combined, give $28,000 to any single individual, or $56K to another married couple, etc. The limit changes annually. The hypothetical in this case is $20,000, which is over the limit, so gift tax would apply.
Some people (let's call them practitioners of tax fraud) don't pay the gift tax, or inflate their basis on gifts, or don't report their capital gains on private sales transactions, and when then get caught, they have an exciting opportunity to be 1) prosecuted for tax evasion and 2) owe significant interest and penalties. I'd hasten to add, though, that the IRS has excellent customer service and should anyone have questions about the application of the law to their facts, they should give them a call.
This is not tax or legal advice, and I am not your tax or legal advisor. Consult an attorney and accountant.
posted by Admiral Haddock at 2:00 PM on September 27, 2013 [2 favorites]
What if I picked it out of her stash after she passed away and the estate was 'closed'. As in she left all her jewels to my uncle, who let me pick through the 'leftovers'.
In this circumstance, the Uncle would own the ring and the Uncle's basis would be the FMV at the time he aquired ownership of the ring. The Uncle would then be gifting the ring to you. Since the value of the ring is over the gift tax exempt amount of $14,000 for 2013, the Uncle would have to pay a gift tax. Your basis on the ring would then be your Uncle's basis (FMV) plus the amount of the gift tax paid if selling for a gain, or your basis would be the FMV at the time your Uncle aquired the ring if selling for a loss.
I'll also jump on the this is not tax or legal advice, and I am not your tax or legal advisor bandwagon.
posted by Arbac at 2:00 PM on September 27, 2013
In this circumstance, the Uncle would own the ring and the Uncle's basis would be the FMV at the time he aquired ownership of the ring. The Uncle would then be gifting the ring to you. Since the value of the ring is over the gift tax exempt amount of $14,000 for 2013, the Uncle would have to pay a gift tax. Your basis on the ring would then be your Uncle's basis (FMV) plus the amount of the gift tax paid if selling for a gain, or your basis would be the FMV at the time your Uncle aquired the ring if selling for a loss.
I'll also jump on the this is not tax or legal advice, and I am not your tax or legal advisor bandwagon.
posted by Arbac at 2:00 PM on September 27, 2013
How soon after she gave it to you did you sell it? Presumably, if that was a short period of time, then it had very little if any appreciation.
If I had to make a bet, regardless of what is the rule or law, I would bet that about 27% of the folks in a similar situation would report it and the other 73% would not.
posted by JohnnyGunn at 2:03 PM on September 27, 2013 [1 favorite]
If I had to make a bet, regardless of what is the rule or law, I would bet that about 27% of the folks in a similar situation would report it and the other 73% would not.
posted by JohnnyGunn at 2:03 PM on September 27, 2013 [1 favorite]
In this circumstance, the Uncle would own the ring and the Uncle's basis would be the FMV at the time he aquired ownership of the ring.
Rather, the FMV at the time of the decedent's death, not when the Uncle acquired it. Given probate, there is a material likelihood that FMV would change between the time of death and receipt.
Again, this is not tax or legal advice, and I am not your tax or legal advisor. Consult an attorney and accountant.
posted by Admiral Haddock at 2:08 PM on September 27, 2013
Rather, the FMV at the time of the decedent's death, not when the Uncle acquired it. Given probate, there is a material likelihood that FMV would change between the time of death and receipt.
Again, this is not tax or legal advice, and I am not your tax or legal advisor. Consult an attorney and accountant.
posted by Admiral Haddock at 2:08 PM on September 27, 2013
Rather, the FMV at the time of the decedent's death, not when the Uncle acquired it. Given probate, there is a material likelihood that FMV would change between the time of death and receipt.
True. Thanks for the correction. Good old probate taking forever.
posted by Arbac at 2:14 PM on September 27, 2013
True. Thanks for the correction. Good old probate taking forever.
posted by Arbac at 2:14 PM on September 27, 2013
Response by poster: This is fascinating and I have too much time on my hands right now.
What if jewels are left to married Uncle who's wife is also a beneficiary to the estate lets you pick through stash? Does that up the gift limit?
Me being the gifted one, where does that fall in the spectrum as far as income from sale?
posted by MayNicholas at 2:32 PM on September 27, 2013
What if jewels are left to married Uncle who's wife is also a beneficiary to the estate lets you pick through stash? Does that up the gift limit?
Me being the gifted one, where does that fall in the spectrum as far as income from sale?
posted by MayNicholas at 2:32 PM on September 27, 2013
A couple of other things to keep in mind for this thought exercise ...
The person who gives the gift is the one that pays the gift tax, not the recipient of the gift.
The person who sells the asset is the one responsible for paying the capital gain tax on the item.
Another thing to keep in mind about the gift limit is that the gift tax is part of the estate tax. Everyone talks about the annual limit, which is convenient because there is no burden on anyone to document those gifts to the IRS (unless you are audited! haha), but there is a lifetime exclusion amount of $5,250,000 (2013). In other words, you can give up to that amount away without having to pay gift tax on it. However, the taxpayer does have to start documenting these gifts to the IRS. This gets a bit convoluted with the step-ups in basis, marital assets, etc etc. But you get the idea.
posted by stowaway at 3:30 PM on September 27, 2013 [3 favorites]
The person who gives the gift is the one that pays the gift tax, not the recipient of the gift.
The person who sells the asset is the one responsible for paying the capital gain tax on the item.
Another thing to keep in mind about the gift limit is that the gift tax is part of the estate tax. Everyone talks about the annual limit, which is convenient because there is no burden on anyone to document those gifts to the IRS (unless you are audited! haha), but there is a lifetime exclusion amount of $5,250,000 (2013). In other words, you can give up to that amount away without having to pay gift tax on it. However, the taxpayer does have to start documenting these gifts to the IRS. This gets a bit convoluted with the step-ups in basis, marital assets, etc etc. But you get the idea.
posted by stowaway at 3:30 PM on September 27, 2013 [3 favorites]
Oh, and to answer your update - if I understand correctly the jewels are left to Uncle and Aunt, a married couple, and they give you one that's worth $20,000? That's gift-splitting, it's allowed, they would not have to pay gift tax. It would be like they each gave you $10,000. They would have to document to IRS, though.
By the way - if you think these hypotheticals are fun - you should seriously think about tax (accounting or law) as a profession.
posted by stowaway at 3:36 PM on September 27, 2013
By the way - if you think these hypotheticals are fun - you should seriously think about tax (accounting or law) as a profession.
posted by stowaway at 3:36 PM on September 27, 2013
OK, IAL, let's unpack the mis-information about US gift tax. No one EVER has to pay tax because they RECEIVED a gift. Period.
The giver of the gift should, if the aggregate value of gifts to this person in this calendar year exceeds this year's exclusion amount, file a gift tax return. This is an informational return only, no tax is owed.
The ONLY time we care about gift tax issues is if a person dies with an aggregate estate (as defined by the IRS) above that year's estate tax threshold. Then, and only then, gifts given to a person, in a year, which exceed that year's gift tax exclusion amount serve to reduce the deceased giftor's estate's unified credit for estate tax purposes.
In your example the ring was a gift to Aunt so her basis in it is $0. It was a gift to you, so your basis, is also $0. If you sell it you do owe capital gains taxes on every penny of money you get because it's all gain.
In the real world. If you sold it to an individual and neither of you reports the transaction on your taxes (only you really have an obligation unless buyer has a very complicated tax situation) you are unlikely to ever get caught out. That is different from whether failure to report is correct. It is not.
posted by BrooksCooper at 9:54 AM on September 28, 2013
The giver of the gift should, if the aggregate value of gifts to this person in this calendar year exceeds this year's exclusion amount, file a gift tax return. This is an informational return only, no tax is owed.
The ONLY time we care about gift tax issues is if a person dies with an aggregate estate (as defined by the IRS) above that year's estate tax threshold. Then, and only then, gifts given to a person, in a year, which exceed that year's gift tax exclusion amount serve to reduce the deceased giftor's estate's unified credit for estate tax purposes.
In your example the ring was a gift to Aunt so her basis in it is $0. It was a gift to you, so your basis, is also $0. If you sell it you do owe capital gains taxes on every penny of money you get because it's all gain.
In the real world. If you sold it to an individual and neither of you reports the transaction on your taxes (only you really have an obligation unless buyer has a very complicated tax situation) you are unlikely to ever get caught out. That is different from whether failure to report is correct. It is not.
posted by BrooksCooper at 9:54 AM on September 28, 2013
Ok, a further point. IF a person has high net worth such that their estate will likely be taxable upon death there can be circumstances where they want to make an over-the-exclusion-limit gift AND report it AND voluntarily pay the tax that year. These are very rare situations.
Isn't tax fun?
posted by BrooksCooper at 9:55 AM on September 28, 2013
Isn't tax fun?
posted by BrooksCooper at 9:55 AM on September 28, 2013
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posted by dfriedman at 12:52 PM on September 27, 2013