Question

5. Netting Capital Gains and Losses. (Obj. 3) In each of the following cases, use the netting! process between groups to determine the taxpayer's net capital gain and the tax rate paid on such gain. Assume the taxpayer files jointly and these are the only capital assets sold during the year. a. A $2,000 loss on the sale of a capital asset held six months; a $9,000 gain on the sale of a capital asset held for three years. Taxable income is $100,000. b. Same as Part a., except that taxable income is $50,000. c. A $6,000 gain on the sale of a capital asset held nine months; a $5,000 gain on the sale of a capital asset held four years. Taxable income is $400,000. d. Same as part c., except that taxable income is $60,000. e. Same as in Part c., except that taxable income is $750,000.

Answer 1

Solution : Calculation of taxable income of taxpayer and tax paid on such income for A. Y. 2019-20

a). Taxable income other than Capital gain   $ 1,00,000

Tax on such income. Nil

Long term Capital gain. $ 7,000

Tax on long term capital gain @ 20%    $ 1,456

Plus 4% education cess

So, net tax payable = $ 1,456

Note :

1). Assuming that taxpayer is an individual below 60 years of age so, taxable income upto $ 2,50,000 is exempt from tax. 2).  Short term capital loss is $ 2,000 and Long term capital gain is $ 9,000 . Short term losses are allowed to be set off against long term capital gain under Income tax Act. So, net long term capital gain is $ 7,000.

b). Taxable income     $ 50,000

Long term capital gain.   $ 7,000

Tax payable on long term capital gain. $ 1,456

c). Taxable income other than capital gain . $ 4,00,000

Short term capital gain. $ 6,000

Long term capital gain. $   5,000

Tax payable on long term capital gain $ 1,040

@ 20% plus 4% education cess

Tax payable on other income of   $ 8,112

$ 4,06,000

Note : Short term capital gain is taxed at normal slab rates of an individual.

d). Taxable income other than capital gain. $ 60,000

Short term capital gain. $ 6,000

Long term capital gain. $ 5,000

Tax payable only on long term capital gain $ 1,040

@ 20% plus education cess 4%

e). Taxable income other than capital gain $ 7,50,000

Short term capital gain. $ 6,000

Tax payable on $ 7,56,000. $ 66,248

Long term capital gain. $ 5,000

Tax payable on long term capital gain. $ 1,040

So, net tax payable is $ 67,288 ( $ 66248 + $ 1,040)