What Are Capital Gains?

What Are Capital Gains?

Jan 09, 2019

Section 199A is the new 20% qualified business income deduction,
however, this deduction is limited to the lesser of that number of
20% of taxable income minus net capital gains.

However, what is net capital gains? The Code refers to net
capital gains as defined in Section 1(h). When you review that
section, capital gains includes the following items of income:

  • Long-term capital gains. This includes gains from selling
    stocks, bonds, etc. held more than one year.
  • Qualified dividend income.
  • Section 1231 gains that are not taxed as ordinary income.
    Section 1231 gains are ordinary to the extent of unrecaptured net
    Section 1231 losses from the prior five years. These gains for
    farmers are typically sales of raised breeding stock or farm
    land.
  • Section 1250 gains. These are gains from selling real estate
    that represents the amount of depreciation taken. They are taxed as
    a maximum 25% rate. Even though the tax rate is same until the
    taxpayer hits at least the 25% tax bracket, they are still part of
    net capital gains.
  • Long-term rate for collectibles. This is a maximum 28% tax rate
    for the sale of collectibles.

This calculation can substantially limit the 199A deduction for
farmers, especially dairy farmers. As an example, assume a dairy
farmer has $500,000 of gains from selling raised breeding stock and
has a $300,000 Schedule F farm loss. None of the gains count as
QBI, therefore, the farmer has to carry over the $300,000 loss to
2019 and start-off that much in the hole.

In our example above, many farmers sell their milk through a
cooperative which will pass out a large DPAD allocation. This DPAD
is allowed to offset 100% of taxable income INCLUDING capital
gains.

Here is another example. Assume a farmer has farm income of
$300,000, has a long-term capital gain income of $300,000 and has
an ordinary loss from the sale of a rental property that is not QBI
of $300,000. Her tentative QBI deduction is $60,000, however, her
net ordinary taxable income is zero (less her standard deduction),
therefore, her allowed 199A deduction is zero and she has to pay
tax on all of the capital gains.

Source: FS – All – Food and Nutrition Blogs
What Are Capital Gains?