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So, here we have George a single taxpayer in

the 32 percent 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 unreal captured Section 1250 gain for $1,000.

How are the above gains and losses netter together?

At what tax rate are the items taxable or deductible?

First, let's review our three steps to

setup 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 percent item,

a 25 percent item or a 0,

15, 20 percent 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 placed 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 percent long-term capital gain column.

Recall that collectibles are subject to the 28 percent capital gain tax rate.

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

Where does that go? Well, since this is a stock sale.

We'll take that $1,000 and place it in the 0,

15, 20 percent 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 at the 25 percent long-term capital gain column.

Recall that this column is reserved only for the unrecaptured Section 1250 gain items.

Okay, so we've 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 done with step two.

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 a short-term item.

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

starting with a 28 percent column and moving to the right.

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

it with the 28 percent 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 percent 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 percent column.

So, let's keep moving to the right.

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

capital loss with a $1,000 capital gain in the zero,

15, 20 percent 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 32 percent.

Meaning that his $7,000 net short-term capital loss wiped out the $6,000 in that

long-term capital gains and the remaining loss will wipe out a

$1,000 of his ordinary income that would have otherwise been taxed at 32 percent.

Therefore, we say that this loss is deductible at 32 percent.

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 zero, 15,

20 percent while the $1,000 net short-term capital loss

remains deductible at 32 percent that is as a for AGI ordinary deduction.

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 setup 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 percent item,

a 25 percent item or a 0,

15, 20 percent item.

Second, we net within each category in our map.

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 percent, 25 percent or 0, 15,

20 percent 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.