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So here, we have George, a single taxpayer in the 33% ordinary income tax bracket,

who had capital gains and losses as follows.

Short-term capital loss of $12,000, short-term capital gain of $5,000,

long-term capital gain from a collectible sale of $4,000,

a long-term capital gain from a stock sale of $1,000 and

a long-term capital gain classified as unrecaptured Section 1250 gain for $1,000.

How are the above gains and losses netted together?

At what tax rate are the items taxable or deductible?

First, let's review our three steps to set up the gains and losses for

the netting procedure.

First, we categorize the gains and losses in the appropriate column,

whether short-term or long-term.

And if they're long-term, whether a 28% item or 25% item or a 0/15/20% item.

Second, we net within each category to get one net number for each category.

Third, we net across categories, moving from left to right using our netting map.

So let's work with our example using this netting map on the slide.

So first, George had a short term capital loss of $12,000.

What do we do with this $12,000?

Well, we'll place this $12,000 in the short-term capital gain or loss column.

Next, George had short-term capital gains of $5,000,

which column does that go into?

Yes, you guessed it, we place the $5,000 in the short-term capital column.

Next, he had a long-term capital gain from a collectible of $4,000.

We'll take that $4,000 and put it in the 28% long-term capital gain column.

Recall the collectibles are subject to the 20% capital gain tax rate.

Next, George had a long-term capital gain from a stock sale of $1,000 dollars.

Where does that go?

Well, since this is a stock sale, we'll take that $1,000 dollars and

place it in a 0/15/20% column.

Finally, George had a long-term capital gain classified as unrecaptured

Section 1250 gain for $1,000, where does this go?

Well, we placed this $1,000 gain in the 25% long-term capital gain column.

Recall that this column is reserved only for

the unrecaptured Section 1250 gain items.

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Okay, so we placed the items in the right category.

The second step of the ordering procedure is to net within each column,

so that we're left with only one number in each column.

So let's first net the short-term capital column.

We have a $12,000 loss and a $5,000 gain.

So when we net them, we're left with a $7,000 net short-term capital loss.

We move to the other columns, but we see that there's only one number in each

column, so really not much else left to net within each column.

So now we're down to step 2.

We have, at most, one net number in each column.

Our third and final step now is to net across categories,

moving from left to right using our netting map directions.

Note here that we have a $7,000 net short-term capital loss.

Also note, that the long-term capital items have gains, that is,

they're of the opposite sign as our short-term item.

Therefore, we can net the short-term items with the long-term items,

starting with the 28% column and moving to the right.

So we take the $7,000 net short-term capital loss, and

net it with a 28% long-term capital gain of $4,000.

We now have a $3,000 net short-term capital loss.

We can continue moving to the right and net this amount,

because we still have long-term capital gains that are of the opposite sign

as our short-term capital loss.

Therefore, we take this $3,000 loss and

net it with a $1,000 gain in the 25% long-term capital gain column,

leaving us with $2,000 in net short-term capital losses.

Note again, we have a loss here, but

a gain in the 0/15/20% column, so let's keep moving to the right.

So what we can do is net the the $2,000 dollar short-term capital loss

with the $1,000 capital gain in a 0/15/20% column.

Here we have a net short-term capital loss that has wiped out all of

the long-term capital gain items.

So what happens now?

Well, if we have a net short-term capital loss,

we can deduct the amount up to $3,000 as a for AGI deduction.

Therefore, at the end of the day, George will report a $1,000 for

AGI deduction, deductible at 33%.

Meaning that his $7,000 net short-term capital loss wiped out

the $6,000 in net long-term capital gains, and the remaining loss will wipe

out $1,000 of his ordinary income that would have otherwise been taxed at 33%.

Therefore, we say that this loss is deductible at 33%.

Okay, now for a small twist, what happens if we assume all the same facts,

except that George has qualified dividends of $250 that he earned from a stock.

Can the $250 qualified dividend offset this $1,000 net short-term capital loss?

Here, the answer is no.

The dividend income cannot offset the capital loss.

We do not net them together.

The $250 dividend will be taxed at preferential rates, or 0/15/20%,

while the $1,000 net short-term capital loss remains deductible at 33%.

That is, as a for AGI ordinary deduction.

Specifically, George's dividends will be taxed at 15% because

its ordinary tax rate is 33%.

So it's neither in the bottom two ordinary income tax rate brackets of 10% or 15%,

nor is it in the highest ordinary income tax rate bracket of 39.6%.

So in summary, this video introduced, at a very high level,

the netting procedure on how to offset gains and losses.

Again, the key is to remember the three steps to set up the netting procedure.

First, we categorize the gains and losses in the appropriate column of our map.

Whether short-term, or long-term, and if it's long-term,

whether a 28% item, a 25% item, or a 0/15/20% item.

Second, we net within each category in our map.

And third, we net across categories,

moving from left to right using our netting map.

To the extent we have net capital gains,

if the gain is short-term it's taxed at ordinary rates.

If the net gain is long-term, it's taxed at preferential rates, maybe 28%, 25%,

or 0/15/20%, depending on what type of long-term capital gain it originally was.

Finally, if we have net losses, whether short-term or long-term,

we can deduct them up to $3,000 as a for AGI ordinary item.

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