Does the NIIT include taxing capital gains and losses from stock sales? Specifically, does line 5a (Net gain or loss from disposition of property) include capital gains and losses from stock sales?
I do note that the definition of Net Investment Income does not include capital gains.
Thank you, Ken
Yes, the net gains are subject to NIIT.
Presumably, you are talking about line 5a on Form 8960 2022 Form 8960 (irs.gov) which says “Net gain or loss from disposition of property (see instructions)”?
If so, then the instructions 2022 Instructions for Form 8960 (irs.gov) for line 5a tell you to include • Form 1040 or 1040-SR, line 7, and Schedule 1 (Form 1040), line 4 which is where your net capital gains are reported on your 1040
Sorry, that’s not correct. From Topic No. 559 Net Investment Income Tax | Internal Revenue Service (irs.gov) (my bolding)
Definition of Net Investment Income and Modified Adjusted Gross Income
In general, net investment income for purpose of this tax, includes, but isn’t limited to:
- interest, dividends, certain annuities, royalties, and rents (unless derived in a trade or business in which the NIIT doesn’t apply),
- income derived in a trade or business which is a passive activity or trading in financial instruments or commodities, and
- net gains from the disposition of property such as stocks, bonds, mutual funds, and real estate (to the extent taken into account in computing taxable income), other than property held in a trade or business to which NIIT doesn’t apply.
- net gains from the sale of a passive partnership or S corporation ownership interests.
Edited to add: I will point out that if some/all of your capital gains are from property that was held in a trade or business to which NIIT doesn’t apply, then you should be using the Lines 5a–5d—Net Gains and Losses Worksheet in the instructions to properly account for disregarding those gains.
AJ
Thank you, AJ. What if there is only a capital loss - could someone use the capital loss as an offset to other investment income?
It is NET Investment Income … in this content, “net” means after balancing the various capital gains and capital losses and coming up with a total. So the answer is yes. If you have $500k gains and $100k losses, then you would use $500-100 = $400k as the base number for net investment gains. But the calculation of the tax is more complicated because it isn’t necessarily on the full amount depending on other income.
Another issue is using capital losses (net capital loss) to offset ordinary income. That is limited to only $3000 per year, but unused losses can be carried over into future years.
Kind of/sort of. After offsetting any other capital gains for 2022, up to an additional $3,000 of capital losses is used to offset ordinary income, including things like interest and non-qualified dividends on your 2022 return. So that will decrease your AGI, and, in turn, the decrease the income subject to NIIT, by up to $3,000. But if you have a net capital loss (after offsetting against your capital gains) in excess of $3,000, those additional losses are carried forward and used to offset capital gains in future years. Each year, if you still have remaining capital losses after offsetting your capital gain, another $3,000 in losses will be used to offset ordinary income and the rest of the loss will again be carried forward.
But if you have net capital losses over $3,000 for 2022 and are trying to offset investment income like interest (or any other investment income that isn’t reported on line 7) in 2022 to avoid NIIT on that interest for 2022, that doesn’t work, beyond the $3,000 that you should have already used to offset ordinary income in 2022.
AJ
If the only item I have in line 5a is a capital loss from sale of stocks (and it’s less than $3,000), can line 5a be a negative number?
Thank you, again.
Since line 5a says " Net gain or loss from disposition of property (see instructions)" that would indicate that it can be a negative.
AJ