The Internal Revenue Service announced (Internal Revenue Bulletin notice 97-59) it will apply new capital gains rules when a technical corrections act is passed -- retroactively -- for tax years ending after May 6, 1997.
The Taxpayer Relief Act of 1997 amended Internal Revenue Code section 1 (h) to provide for new capital gains rates for individual taxpayers. However, the act did not clarify how Congress wanted capital gains and losses netted or what holding periods would apply to different transactions. With the help of key members of Congress, the IRS has summarized the technical corrections and described how the new section 1 (h) rules will be administered.
For example, if an individual taxpayer has a net capital gain, the long-term capital gains and losses would be separated into three tax rate groups: 28%, 25% and 20% (10% for gains that otherwise would be taxed at 15%). Gains and losses within each group would be netted to arrive at a net gain or net loss for each group. The following additional netting and ordering rules also would apply:
* Short-term capital losses (including short-term capital loss carryovers) would offset short-term capital gains. Any remaining net short-term capital loss would then be applied to reduce any net long-term capital gain from each of the tax rate groups, starting with the 28% group.
* For long-term gains and losses, a net loss from the 28% group (including long-term capital loss carryover) would...