Welcome back.

Recall from the previous video,

we introduced the idea of character of gains and losses.

The character of recognized gains and losses matters, because it will determine

which tax rate the taxpayer will use to calculate his or her tax liability.

The type of asset whether ordinary, capital or

section 1231 will determine the character of the income or loss.

In this video, I'll introduce the netting process.

Here, the netting process is the most important aspect in determining

the gain and loss amounts in tax treatment.

Here, let's just make sure we introduce some very basic definitions.

Let's say, we have two capital assets and one is sold at a gain and

one sold at a loss.

How do we tax these two gains and losses?

Well, basically, we can combine or

net the gain with the loss to determine whether we have a net gain or a net loss.

If a short-term capital gain on the first asset is greater

than the short-term capital loss on the second asset,

we can net the two and look at a net short term capital gain.

If the short-term capital gain in the first asset is smaller than the short-term

capital loss in the second asset and we net the two,

we get a net short-term capital loss.

The same idea goes for long-term capital gains and losses.

If a long-term capital gain is greater than a long-term capital loss and

we net the two, we get a net long-term capital gain.

And if a long-term capital gain is smaller than our long-term capital loss and

we net the two, we get a net long-term capital loss.

Importantly, net short-term capital gains are taxed at ordinary tax rates and

net short-term capital losses provide for an ordinary tax deduction.

That is a deduction against ordinary income, but

only up to $3,000 for individuals per year.

This is a for AGI deduction.

This $3,000 deduction limitation also applies if the loss is a net

long-term capital loss and note that the limit is $3,000 total for

all short-term, and long-term net losses combined.

It's not a $3,000 limit for short-term losses and another $3,000 limit for

long-term losses.

Also note that it's a $3,000 limit for all individual tax pair filing statuses.

So for example, a married filing joint taxpayer will not get a $6,000 net

capital loss limitation even though there are two people on the tax return.

The limit stays at $3,000 per year which is in fact,

the same as a single person's limitation.

So we now know how three of the four netted items are taxed.

We've covered net short-term capital gains and both net short-term, and

long-term capital loses.

So how are net long-term capital gains taxed?

The answer is it depends.

Ultimately, long term capital gains will be taxed at either 0%, 15% or 20%.

Which rate it is taxed at depends on where a taxpayers

taxable income falls on a separate tax rate schedule

used to determine the applicable long-term capital gains rate.