Your Tax Questions Answered

Gunning for the Zero Capital Gains Tax

Kiplinger editorial director Kevin McCormally and fellow tax experts Peter Blank and Mary Beth Franklin tackle your most pressing tax challenges.

By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance

December 22, 2009

QUESTION:

I have a vexing tax question regarding the 0% capital gains rate for 10% and 15% bracket filers. Say you realized a $20,000 capital loss on your 2008 return. You can only claim $3,000 in your 2008 return, so you have $17,000 in carry-over losses into 2009. In 2009 you realize a large capital gain, say $15,000. Does the $15,000 gain offset against the $17,000 carryover, resulting in a $2,000 carryover loss in 2009 and no further carry over in the years ahead? If so, you're not really not getting the benefit of the 0% capital gains rate. Is there some way to get the 0% rate on the gain, and also take the $3,000 loss carryover? If not, can you defer carrying the loss for 2009, and start taking it in 2010 instead? Thanks!

ANSWER

The 0% capital gains rate apply to net, long-term capital gains for taxpayers in the two lowest tax brackets in 2008, 2009 and 2010.

In your example, you must use your $17,000 in carry-over losses to offset your $15,000 of capital gains in 2009 and then you could use your excess $2,000 of capital losses to offset up to $2,000 of ordinary income in 2009. Therefore, you won’t be able to take advantage of the 0% capital gain rate in 2009, but as long as you remain in the 10% or 15% tax bracket, you can take advantage of the 0% capital gains rate in 2010.

QUESTION:

We can limit our (married couple) Line 43 Form taxable income to $67,200 in 2009 which includes short term capital gains of $90,400 after %15,200 carry forward losses from 2008. Additionally we had $23,200 long term loss carry over from 2008 (no gains this year).

I have talked to three tax offices but they say the 0% tax on capital gains provision ONLY applies to LONG TERM GAINS. If it applies to short term gains somewhere on Schedule D, the Capital Gains Worksheet or in the tax table I can't spot it. Is this little-known 2003 provision simply built into the mix so as to be indiscernible?

ANSWER

That’s correct. The 0% rate applies to net long-term capital gains for taxpayers in the 10% and 15% tax brackets in 2008, 2009, and 2010. Short-term capital gains, which are profits on the sale of assets held one year or less, are taxed at ordinary income tax rates and do not qualify for preferential capital gains rates. Here's a summary from the IRS Web site.

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