Netting Gains & Losses

Whenever a property is sold, exchanged or otherwise disposed of, a realization occurs, and the entity owning the property must calculate the gain (loss) resulting from the disposition of the property. A capital gain or a capital loss results from the sale or other disposition of a capital asset. Timber would be considered a capital asset if it is not held for use in a trade or business, and is not held primarily for the sale to customers in the ordinary course of a trade or business. All capital gains and losses occurring during a tax year are aggregated through a prescribed netting procedure to determine the net effect of all capital asset transactions for the year. The special tax treatments are applied only to the net results for the year, not to individual transactions. The following steps can be used to determine the net long-term capital gains for the year.

Step 1 - Segregate all capital gains and losses occurring during the year into short-term gains and losses and long-term gains and losses.

Step 2 - Combine all long-term gains and losses to determine a net long-term position for the year. Combine all short-term gains and losses to determine a net short-term position for the year.

Long-term gains	$ XXX
Long-term losses	$(XXX)
Net long-term gain (loss)	$ XXX or (XXX)
Short-term gains	$ XXX
Short-term losses	$(XXX)
Net short-term gain (loss)	$ XXX or (XXX)

Step 3 - If the positions determined in step 2 are opposite (i.e., one is a gain and one is a loss), net the two positions together to obtain either a gain or a loss position for the year. If the positions determined in step 2 are the same (i.e., either both are gains or both are losses), no further netting is necessary.

Step 4 - Once the netting procedure is done there are four possible types of capital gains and losses that could occur. The following table lists those possibilities and how they should be handled.

Capital Gain (loss) Position	Individual Treatment	Corporate Treatment
Net short-term capital gain	Ordinary Income	Ordinary income
Net short-term capital loss	Deductible loss for adjusted gross income; limited to $3,000 per year with indefinite carryforward of excess loss to future years netting.	No current deduction; may carry back 3 years and forward 5 years to offset capital gains.
Net long-term capital gain	Taxed at a maximum rate of 15%. Capital gain holding requirements.	Ordinary income
Net long-term capital loss	Deductible loss for AGI; limited to $3,000 per year with indefinite carryforward of excess loss to future years' netting. Any short-term losses are applied against the $3,000 limit before long-term capital losses are deducted.	No current deduction; may carry back 3 years and forward 5 years to offset capital gains.