There are new capital gains rates available for assets held for more than five years. The rules are different depending on what tax bracket the taxpayer is in.

For those in the 15% tax bracket, the long term capital gain rate is 8% on assets held more than five years and sold after December 31,2000. The 8% rate applies regardless of when the five-year holding period began and it applies to the extent that the taxpayer is in the 15% bracket.

For those in the 28% tax bracket or higher, the long term capital gains rate drops to 18 % for assets purchased after December 31,2000 if the asset is held for more than five years. Capital gains of assets held 1 to 4 years or purchased before January 1,2001 will still be taxed at 20%.

Note: Because the asset must be held five years and must be acquired after December 31, 2000, the 18% tax rate will not apply before 2006.

In determining if the holding period begins after December 31,2000 for this special 18% rate, taxpayers must include the option holding period. So if an employer grants an employee incentive stock option in the year 2000, stock acquired by exercising the option will not be eligible for the 18% rate, even if the stock is acquired in 2001.

Special Election to use the 18% Rate instead of the 20% Rate

Taxpayers other than corporations can elect to treat capital assets, business assets, and stock held on January 1, 2001, as if they are sold for their fair market value in order to reset the acquisition date so the future appreciation can qualify for the 18% rate. The gain from the deemed sale is taxable, however any loss resulting from this election is not allowed. This election is irrevocable.

Note : This election can not be used on a personal residence.

When to use this election: A taxpayer should use this election when a stock has a small gain and the taxpayer expects appreciation in the future and he plans on holding the stock for more than five years after January 1,2001.

Carol J. Patrick, CPA