Selling an investment, withdrawing retirement savings, and giving property away can each move money without producing the same tax result. Capital gains, pension and retirement plan distributions, and wealth transfers therefore require different tax treatment in your recommendation.
Before recommending a sale, establish how much investment cost the client can recover when calculating capital gains or losses. Adjusted basis is the property's tax cost after applicable adjustments. It usually starts with purchase cost under Internal Revenue Code (IRC) §1012.
Gain or loss generally equals the amount realized, generally net sale proceeds, minus adjusted basis. Selling for $14,000 with $10,000 basis produces $14,000 − $10,000 = $4,000 gain under IRC §1001. With multiple purchase lots, specific identification means documenting which shares you sell, so their basis and holding period determine the result.
Gifts and inheritances use different starting points for tax basis:
- Gifted property: Use the donor's adjusted basis for gains. If gift-date fair market value is lower, use that lower value for losses under IRC §1015.
- Inherited property: Generally use fair market value at death under IRC §1014. This can increase or decrease basis. Inherited capital assets receiving this basis receive long-term treatment under IRC §1223.
Common mistakes
- Stopping at one year. Holding stock exactly one year produces short-term treatment; the preferential holding period requires more than one year.
- Applying the loss ceiling early. The $3,000 limit concerns losses remaining after gains are offset, not the amount usable against capital gains.
- Counting only replacement purchases afterward. Buying identical shares 20 days before a loss sale can trigger the wash-sale rule.
Bottom line
- Net short-term gains face ordinary rates; most net long-term gains and qualified dividends receive 0%, 15%, or 20% rates.
- Individuals generally deduct up to $3,000 of net capital losses against other income and carry unused losses forward.
- Gifts generally use donor basis for gains; inherited property generally uses death-date value.
- AMT adds the excess of tentative minimum tax over regular tax.
Exam shortcut
Label every number before calculating: sale proceeds, basis, ordinary taxable income, Medicare MAGI, or transfer amount. Similar dollar figures can belong to different tax systems. For sales, establish basis and holding period, check wash sales, net each category, and then apply rates. Fill unused 0% space before using 15%. For retirement questions, draw the calendar first. Circle “first RMD,” “paid to participant,” and “still working”; each signals a different rule.
The full lesson (about 3,678 words, 25 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- C13
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