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Phil, you'll love this.

A couple of weeks ago, trying to get more information about the new 18% 5 year capital gains rate and the fictional buy/sell of previously owned equities and equity funds, I e.mailed the IRS. I already shared the response I received, which stated that the value to use for the fictional buy/sell was at the open of 1/2/01 (the legislation uses the date 1/1/01 when the markets were closed). Today, without my having written again, I received another response.

The bottom line of this response is that the key value is at the close, not the open of 1/2/01. This is significant, because the first day of trading was not good for many stocks, so a decision on whether or not to elect to do the fictional buy/sell (my cut off is a 10% loss from when I bought) may depend on which is correct, opening or closing value.

"Due to a systemic problem, we may have responded to this message before. Please accept our apology for any inconvenience.
The deemed sale applies to any capital asset except collectibles and section 1250 recapture.
Mutual funds would be included. The code section 1(h) includes the election to treat property as sold on 1-1-2001. In the case of readily tradable stock that is held on Jan 1, 2001 it is treated as sold on the next business day, Jan 2, 2001 at its closing market price and bought on the same day at its closing market price. The deemed sale will be reported on schedule D and any tax due on a gain will be due and any loss will be disallowed. The sale will be treated as occurring on Jan 2, 2001 so will be reported on the return due April 15, 2002. There is also a required one year wait for the election to be valid. If the asset is actually sold before Jan 2, 2002 the deemed election is invalid. The deemed election starts a new holding period so 2006 is the first year someone in a 28% bracket could take advantage of the 2% difference in capital gain tax rates."

Phil, I'm assuming what is meant by the 28% bracket here is the capital gains rate bracket, which is really 20% but still called 28% on the forms, etc. Is that right?
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Phil, I'm assuming what is meant by the 28% bracket here is the capital gains rate bracket, which is really 20% but still called 28% on the forms, etc. Is that right?

No. You're probably thinking of the "28% gains," a subset of long-term capital gains. The "28% bracket" is the standard tax bracket found on the Tax Rate Schedules.

BTW, we're still trying to get some clarification on whether one can combine the 1/1/2001 deemed sale and the section 121 exclusion of gain on sale of personal residence.

TMF ExRO
Phil Marti
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"No. You're probably thinking of the "28% gains," a subset of long-term capital gains. The "28% bracket" is the standard tax bracket found on the Tax Rate Schedules."

I think the IRS message is confusing. What was probably meant was 28% or higher bracket.

By the ways, as to which is right, open or close of 1/2/2001, common sense (which doesn't necessarily apply to IRS matters) suggests it should be the open, since that way people could use the values listed on their closing statements for 2000. Finding the closing values for 1/2/2001 is a pain, even if you know how to do it (I've never even tried to see if I can get an historical quote for a mutual fund).
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By the ways, as to which is right, open or close of 1/2/2001, common sense (which doesn't necessarily apply to IRS matters) suggests it should be the open, since that way people could use the values listed on their closing statements for 2000. Finding the closing values for 1/2/2001 is a pain, even if you know how to do it (I've never even tried to see if I can get an historical quote for a mutual fund).

Actually, it's just the opposite. Common sense says use the 1/2/01 close. The 1/2/01 open is not necessarily the same as the 12/29/00 close (for mutual funds it is, for stocks it rarely is). Remember, the "open" is the price of the first trade of the day, not the last trade of the previous day.

Very few newspapers list opening prices. There are plenty of off- and on-line sources for historical closing prices. Just look at any good newspaper dated 1/3/01 for the 1/2/01 closing prices.

Ira
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"Actually, it's just the opposite. Common sense says use the 1/2/01 close. The 1/2/01 open is not necessarily the same as the 12/29/00 close (for mutual funds it is, for stocks it rarely is). Remember, the "open" is the price of the first trade of the day, not the last trade of the previous day."

Ira,
I agree the actual opening number for 1/2/01 would be even more of a pain to find than the closing number. I still think think what's on the statement at the end of 2000 makes most sense, and unless I see something explicit from the IRS telling me otherwise in next year's instructions, I'm taking the official date of 1/1/01 literally and using the values on my statement for one basic reason: the numbers are more favorable.
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I agree the actual opening number for 1/2/01 would be even more of a pain to find than the closing number. I still think think what's on the statement at the end of 2000 makes most sense, and unless I see something explicit from the IRS telling me otherwise in next year's instructions, I'm taking the official date of 1/1/01 literally and using the values on my statement for one basic reason: the numbers are more favorable.

You don't have that choice, and you don't have to wait until next year to be told so. See the instructions for this year's Form 4797 and the soon-to-be-issued article by TMF Taxes.

TMF ExRO
Phil Marti
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Thanks, Phil. I knew I had seen an official pronouncement, and wanted to cite it, but couldn't remember where I had seen it.

Ira
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