830 CMR 62.00: INCOME TAX
830 CMR 62.00 is hereby repealed and replaced with the following:
830 CMR 62.4.1: Capital Gains and Losses
(1) Purpose, Effective Date.
(a) Purpose. This regulation explains the Massachusetts personal income tax treatment of capital gains and losses under M.G.L. c. 62, as amended by St. 1994, c. 195 and St. 1999, c. 127.
(b) Effective Date. This regulation, 830 CMR 62.4.1, shall take effect upon promulgation.
(2) Definitions. For purposes of this regulation, 830 CMR 62.4.1, the following terms shall have the following meanings, unless the context requires otherwise.
Capital Asset, any asset that is a capital asset for federal tax purposes within the meaning of Code section 1221, or is property that is used in a trade or business within the meaning of Code section 1231(b) without regard to the holding period set out in said section 1231(b).
Capital Gain, gain on the sale or exchange of a capital asset determined using the Massachusetts adjusted basis as provided in M.G.L. c. 62, §6F, excluding gain on the sale or exchange of any bond issued by the Commonwealth, its political subdivisions, or agencies and instrumentalities, if such gain is specifically exempted from the personal income tax by statute.
Capital Loss, loss on the sale or exchange of a capital asset determined using the Massachusetts adjusted basis as provided in M.G.L. c. 62, §6F, excluding loss on the sale or exchange of any bond issued by the Commonwealth, its political subdivisions, or agencies and instrumentalities, if gain on the sale or exchange of such bond is specifically exempted from the personal income tax by statute.
Code, the Internal Revenue Code of the United States as it applies to the Massachusetts personal income tax under the provisions of M.G.L. c. 62.
Collectible, any capital asset that is a collectible within the meaning of Code section 408(m), as amended and in effect for the taxable year, including works of art, rugs, antiques, metals, gems, alcoholic beverages, certain coins, and any other items treated as collectibles for federal tax purposes.
Holding Period, the holding period as determined for federal income tax purposes, except that the holding period shall not begin before January 1, 1995, unless otherwise provided in 830 CMR 62.4.1.
Long-term Capital Gain or Loss, gain or loss on the sale or exchange of a capital asset held for more than one year.
Sale or Exchange, any disposition that is a sale or exchange for federal tax purposes within the meaning of Code section 1222, 1231 or other relevant Code provision, or any disposition that is a compulsory or involuntary conversion for federal tax purposes within the meaning of Code section 1231(a)(3)(A)(ii), if and to the extent that gain or loss on the disposition or conversion is taken into account in determining the taxpayer's federal income tax liability under the Code.
Short-term Capital Gain or Loss, gain or loss on the sale or exchange of a capital asset held for one year or less.
Taxpayer, any person subject to the tax imposed by M.G.L. c. 62, including individuals, trustees and other fiduciaries, estates and corporate trusts.
(3) General.
(a) Capital Gains. Massachusetts gross income includes all capital gains recognized by taxpayers that are subject to the personal income tax, but does not include capital gains that are specifically exempted from the personal income tax by statute. Capital gains recognized by nonresidents are included only if the gains are from sources within the Commonwealth within the meaning of M.G.L. c. 62, §5A and 830 CMR 62.5A.1(3).
(b) Capital Losses. Capital losses are taken into account only if the loss is recognized on the sale or exchange of a capital asset which, if sold or exchanged for an amount greater than its Massachusetts adjusted basis, would result in a capital gain included in Massachusetts gross income. Capital loss that is disallowed as a deduction under Code section 165(c) (losses on personal use property), section 262 (personal expenses) or section 267 (losses between related parties) shall not be taken into account.
(c) Federal Recapture Rules. The entire amount of gain on the sale or exchange of a capital asset is a capital gain for Massachusetts purposes regardless of whether any part of the gain is subject to recapture as ordinary income for federal tax purposes under Code sections 1245, 1250, 1255, or any other federal recapture provision.
(d) Holding Period. For purposes of determining the length of time a capital asset is held under this regulation, the Massachusetts holding period is generally the same as the holding period determined for federal tax purposes under the applicable provisions of the Code. However, for Massachusetts purposes, a capital asset acquired before January 1, 1996, is deemed to have been acquired on the later of (i) January 1, 1995 or (ii) the date of actual acquisition. For Massachusetts purposes, the holding period of a capital asset acquired from a decedent to which Code section 1223(11) and the holding period of any capital asset to which Code section 1223(12) applies, is deemed to be the longer of (i) the actual holding period, measured from the date of the decedent's death or (ii) one year and one day.
Thus, if the estate of a decedent sells a capital asset that it acquired from the decedent, the estate's holding period is measured from the date of the decedent's death regardless of the length of time the decedent held the property. However, regardless of when the sale takes place, the estate's holding period will not be less than one year and one day.
(4) Division of Capital Gains and Capital Losses into Two Parts. Capital gains included in gross income under 830 CMR 62.4.1(3)(a) and capital losses that are taken into account under 830 CMR 62.4.1(3)(b), are divided into the following two parts:
(a) Part A Capital Gains and Capital Losses:
1. Part A capital gains are long-term capital gains on the sale or exchange of collectibles and short-term capital gains.
2. Part A capital losses are short-term capital losses.
(b) Part C Capital Gains and Capital Losses:
1. Part C capital gains are long-term capital gains other than long-term capital gains on the sale or exchange of collectibles.
2. Part C capital losses are long-term capital losses including long-term capital losses on the sale or exchange of collectibles. Losses on the sale or exchange of collectibles that are held for personal use are not deductible.
(5) Taxation of Part A Capital Gains. Short term capital gains and gains on the sale of collectibles are included in Part A gross income, along with dividends and certain types of interest income. Neither Part A nor Part C capital losses are taken into account in determining Part A gross income. Rather, Part A and Part C capital losses may be deducted from Part A gross income as provided in 830 CMR 62.4.1(5)(a) and (b). The tax on Part A income is determined in the following manner.
(a) Determination of Part A Adjusted Gross Income. First, Part A gross income is reduced by the following deductions in the following order to determine Part A adjusted gross income:
1. Excess Part B deductions. A deduction is allowed under M.G.L. c. 62, § 2(c)(1), for excess Part B adjusted gross income deductions, up to the amount of Part A gross income that is effectively connected with the active conduct of a trade or business of the taxpayer.
2. Short-term capital losses. A deduction is allowed for short-term capital losses, including unused short-term capital losses carried forward from prior taxable years. Any short-term capital losses that remain after the deduction allowed under this provision, 830 CMR 62.4.1(5)(a)2., may be deducted from long-term capital gains included in Part C income as provided in 830 CMR 62.4.1(6)(d). Any short-term capital losses that remain after the deductions allowed under this provision, 830 CMR 62.4.1(5)(a)2., and 830 CMR 62.4.1(6)(d), are carried forward and treated as short-term capital losses in the subsequent taxable year.
3. Unused long-term capital losses. A deduction is allowed for Part C capital losses that remain after the deductions from Part C capital gains allowed under 830 CMR 62.4.1(6)(b)1., and 2 and 830 CMR 62.4.1(6)(c), below. For purposes of this deduction, Part C capital losses within each class are applied in the order set forth in 830 CMR 62.4.1(6)(b)3., and are reduced by the amount deducted. Any Part C capital losses that remain after Part A gross income has been completely offset by this deduction are carried forward and treated as Part C capital losses in the subsequent taxable year as provided in 830 CMR 62.4.1(6)(b)3.
4. Long-term capital gains deduction. A deduction is allowed in an amount equal to fifty percent of the excess of long-term capital gains on the sale or exchange of collectibles over the sum of (i) short-term capital losses that are deductible from Part A gross income under 830 CMR 62.4.1(5)(a)2., above and (ii) Part C capital losses that are deductible from Part A gross income under 830 CMR 62.4.1(5)(a)3.
If the resulting amount is positive, that amount is Part A adjusted gross income for the taxable year. If the resulting amount is zero or negative, Part A adjusted gross income for the taxable year is zero.
(b) Determination of Part A Taxable Income. Second, except in the case of a corporate trust, Part A adjusted gross income is reduced by the following deductions in the following order to determine Part A taxable income:
1. The deductions allowable to trustees and other fiduciaries under M.G.L. c. 62, §§ 3(A)(a)(1) and (2), and M.G.L. c 62, §§9 and 10; and
2. The deduction for excess Part B exemptions allowable under M.G.L. c. 62, § 3(A)(b).
If the resulting amount is positive, that amount is Part A taxable income for the taxable year. If the resulting amount is zero or negative, Part A taxable income for the taxable year is zero.
(c) Determination of Part A Tax. Third, Part A taxable income is separated into two components; Part A taxable income attributable to capital gains and Part A income attributable to interest and dividends. Each component is subject to tax at the rates set forth in 830 CMR 62.4.1(5)(c)3.
1. Part A taxable income attributable to capital gains. Part A taxable income attributable to capital gains is determined by reducing Part A taxable income by the total amount of interest and dividends included in Part A gross income. If the resulting amount is positive, that amount is Part A taxable income attributable to capital gains. If the resulting amount is zero or negative, no portion of Part A taxable income is attributable to capital gains.
2. Part A taxable income attributable to interest and dividends. Part A taxable income attributable to interest and dividends is determined by reducing total Part A taxable income by the amount of Part A taxable income attributable to capital gains determined under 830 CMR 62.4.1(5)(c)1.
3. Applicable tax rates. Part A taxable income attributable to capital gains is subject to tax at a rate of 12 percent. Part A taxable income attributable to interest and dividends is subject to tax at the following rates for the following taxable years:
a. 5.95 percent for taxable years beginning before January 1, 2000;
b. 5.85 percent for taxable years beginning on or after January 1, 2000 and before January 1, 2001;
c. 5.80 percent for taxable years beginning on or after January 1, 2001 and before January 1, 2002; and
d. 5.75 percent for taxable years beginning on or after January 1, 2002.
(6) Taxation of Part C Capital Gains. Part C gross income includes all Part C capital gains. Neither Part A nor Part C capital losses are taken into account in determining Part C gross income. Rather, Part A and Part C capital losses may be deducted from Part C gross income as provided in 830 CMR 62.4.1(6)(a) through (e). The tax on Part C income is determined in the following manner.
(a) Classification of Part C Gains and Losses. First, prior to any netting, Part C capital gains and Part C capital losses are be divided into six classes based on the holding period of the capital asset that was sold or exchanged. Such classification must be made using the following table:
Holding Period
(in years) Class
More than one but not more than two B
More than two but not more than three C
More than three but not more than four D
More than four but not more than five E
More than five but not more than six F
More than six G
Part C capital gains, so classified, comprise Part C gross income.
(b) Part C Adjusted Gross Income. Second, each class of Part C gross income may be reduced by capital losses and excess Part B deductions in the manner and order set forth in 830 CMR 62.4.1(6)(b)1. through 5.
1. Netting of Part C Capital Gains and Losses Within Each Holding Period. Part C capital gains and capital losses within each class shall be netted. The resulting amount comprises Part C net gain or Part C net loss within each class.
2. Offset of Part C Gains and Losses From Different Holding Period. Part C net capital losses within any class, as determined under 830 CMR 62.4.1(6)(b)1., above, may be deducted from Part C net capital gains within other classes. The deductions under 62.4.1(6)(b), are applied in the following order:
a. Any Class B net capital gain is reduced (but not below zero) by net capital losses within other classes. The amount of such net capital losses from other classes subsequently available to be applied against other income or to be carried forward is reduced by the amount of the loss used to offset Class B net capital gain. Such net capital losses are applied to reduce Class B net capital gain in the following order:
(i) Class C net losses;
(ii) Class D net losses;
(iii) Class E net losses;
(iv) Class F net losses;
(v) Class G net losses.
b. Any Class C net capital gain is then reduced (but not below zero) by any remaining net capital losses within other classes. The amount of such net capital losses from other classes subsequently available to be applied against other income or to be carried forward is reduced by the amount of the loss used to offset Class C net capital gain. Such net capital losses are applied to reduce Class C net capital gain in the following order:
(i) Class B net losses;
(ii) Class D net losses;
(iii) Class E net losses;
(iv) Class F net losses;
(v) Class G net losses.
c. Any Class D net capital gain is reduced (but not below zero) by any remaining net capital losses within other classes. The amount of such net capital losses from other classes subsequently available to be applied against other income or to be carried forward is reduced by the amount of the loss used to offset Class D net capital gain. Such net capital losses are applied to reduce Class D net capital gain in the following order:
(i) Class B net losses;
(ii) Class C net losses;
(iii) Class E net losses;
(iv) Class F net losses;
(v) Class G net losses.
d. Any Class E net capital gain is then reduced (but not below zero) by any remaining net capital losses within other classes. The amount of such net capital losses from other classes subsequently available to be applied against other income or to be carried forward is reduced by the amount of the loss used to offset Class E net capital gain. Such net capital losses are applied to reduce Class E net capital gain in the following order:
(i) Class B net losses;
(ii) Class C net losses;
(iii) Class D net losses;
(iv) Class F net losses;
(v) Class G net losses.
e. Any Class F net capital gain is then reduced (but not below zero) by any remaining net capital losses within other classes. The amount of such net capital losses from other classes subsequently available to be applied against other income or to be carried forward is reduced by the amount of the loss used to offset Class F net capital gain. Such net capital losses are applied to reduce Class F net capital gain in the following order:
(i) Class B net losses;
(ii) Class C net losses;
(iii) Class D net losses;
(iv) Class E net losses;
(v) Class G net losses.
f. Any Class G net capital gain is then reduced (but not below zero) by any remaining net capital losses within other classes. The amount of such net capital losses from other classes subsequently available to be applied against other income or to be carried forward is reduced by the amount of the loss used to offset Class G net capital gain. Such net losses are applied to reduce Class G net capital gain in the following order:
(i) Class B net losses;
(ii) Class C net losses;
(iii) Class D net losses;
(iv) Class E net losses;
(v) Class F net losses.
3. Application of long-term losses against Part A income. Any net capital loss remaining after the netting process described in 830 CMR 62.4.1(6)(b)1., and the deductions allowed under 830 CMR 62.4.1(6)(b)2., may be deducted from Part A gross income as provided in 830 CMR 62.4.1(5)(a)3. Each class of Part C net capital loss shall be reduced by the amount of such loss that is applied to reduce Part A gross income. For purposes of the deduction from Part A gross income, Part C net capital losses within the various classes shall be applied in the order listed in the table in 830 CMR 62.4.1(6)(a). The amount of Part C net capital loss remaining in any class after the deduction from Part A gross income allowed under 830 CMR 62.4.1(5)(a)3., shall be a Part C capital loss within the same class in the succeeding taxable year.
4. Deduction of Unused Short-Term Losses. A deduction is allowed for short-term capital losses that remain after the deduction from Part A gross income allowed under 830 CMR 62.4.1(5)(a)2. The amount of such remaining short-term capital loss shall be reduced by the amount of such loss that is applied to reduce any class of Part C net capital gain. Such Part A capital losses are applied to reduce the various classes of Part C net capital gains within each class in the order in which the gains are listed in the table in 830 CMR 62.4.1(6)(a).
Any Part A capital losses that remain after the deductions allowed under 830 CMR 62.4.1(6)(b)4., are carried forward and treated as Part A capital losses in the subsequent taxable year as provided in 830 CMR 62.4.1(5)(a)2. and 830 CMR 62.4.1(6)(b)4.
5. Excess Part B deductions. A deduction is allowed under M.G.L. c. 62, § 2(e)(I)(2), for excess Part B adjusted gross income deductions. The amount of the deduction is equal to the amount of deductible excess Part B losses that remain after such losses are deducted from Part A gross income as provided in 830 CMR 62.4.1(5)(a)1. The amount of the deduction under this provision, 830 CMR 62.4.1(6)(e), shall not exceed the aggregate amount of Part C gross income that is effectively connected with the active conduct of a trade or business of the taxpayer. Excess Part B deductions shall not be applied to increase the amount of any class of Part C capital loss and shall not reduce the amount of any class of Part C capital gain below zero. The allowable deduction for excess Part B deductions is applied to reduce the various classes of Part C net capital gains in the order in which the gains are listed in the table in 830 CMR 62.4.1(6)(a). Excess Part B deductions that cannot be used in a taxable year may not be carried over to subsequent taxable years.
6. Resulting Amount. The amount of net capital gain within each class of Part C income after the deductions allowed under 830 CMR 62.4.1(6)(b)1. - 5., shall comprise Part C adjusted gross income.
(c) Modifications to the Part C Adjusted Gross Income of Trustees. Third, except in the case of corporate trusts, the adjusted gross income of trustees and other fiduciaries shall be modified as allowed by M.G.L. c. 62, §3.C.(a)(1) and (2), to take into account the deductions for amounts payable to or accumulated for out-of-state beneficiaries and charitable organizations.
(d) Excess Part B Exemptions. Fourth, except in the case of corporate trusts, positive Part C adjusted gross income shall be reduced by any excess Part B exemptions, provided that such exemptions shall be first applied against Part A adjusted gross income. To the extent that they may be applied against Part C adjusted gross income, excess Part B exemptions shall be applied against each class of net capital gain in the order listed in the table in 830 CMR 62.4.1(6)(a). Excess Part B exemptions shall not be applied to increase the amount of any class of net capital loss and may not reduce the amount of any class of net capital gain below zero. Excess Part B exemptions that cannot be used in a taxable year may not be carried over to subsequent taxable years.
The resulting amounts within each class of net capital gain or net capital loss shall comprise Part C taxable income.
(e) Computation of the Part C Tax. Fifth, to determine the Part C tax, the amount of each class of Part C taxable income is multiplied by the applicable rate according to the following table.
Class of
Net Gain Rate
B 5 %
C 4 %
D 3 %
E 2 %
F 1 %
G 0 %
The Part C tax is the sum of the amounts resulting from each such multiplication.
(7) Installment Sales. Where a capital asset is sold or exchanged in an installment transaction and the taxpayer elects to pay the personal income tax on capital gain attributable to such sale or exchange in installments pursuant to M.G.L. c. 62, §63, the following rules shall apply:
(a) Holding Period. The holding period shall be determined on the date on which the sale or exchange takes place, regardless of when the payment is received.
(b) Characterization of Gain. Capital gains are characterized under the law in effect when the installment sale took place. Thus, all capital gains from installment sales prior to January 1, 1996 are Part A income. Long-term capital gains from such sales continue to be eligible for a fifty percent long-term capital gains deduction if the deduction was available for such gain under prior law. The amount of the deduction shall be determined under 830 CMR 62.4.1(5)(a)4., as though the installment gain were a gain on the sale or exchange of a collectible. In addition, Code section 1231 gain recognized in a sale or exchange prior to January 1, 1996, shall continue be reported as ordinary (i.e., Part B) income.
(8) Unused Capital Loss Carryovers Under Prior Law. Where a taxpayer has any unused short-term capital loss or long-term capital loss at the end of the taxpayer's last taxable year beginning before January 1, 1996, the following rules shall apply:
(a) Short-Term Capital Loss. Such short-term capital loss shall be taken into account in the succeeding taxable year as loss on the sale or exchange of a capital asset held for one year or less (i.e., Part A capital loss).
(b) Long-Term Capital Loss. Such long-term capital loss shall be taken into account in the succeeding taxable year as loss on the sale or exchange of a capital asset held for more than one year but not more than two years (i.e., such loss is Part C, Class B loss).
(9) Mutual Funds.
(a) Sales of Shares. Mutual fund shareholders must account for sales of shares in the same manner as they do for federal income tax purposes. Where a shareholder accounts for the sale using an average basis then (i) the Massachusetts adjusted basis shall be determined in the same manner and (ii) the Massachusetts holding period for each share shall be averaged in the same manner and the resulting average shall be deemed to be the holding period for all of the shares sold.
(b) Capital Gain Dividends. Where a taxpayer receives a distribution that is treated as a capital gain distribution under the Code, the distribution is included in Part C income. A mutual fund may (i) determine the amount of the capital gain dividend attributable to each class of Part C income and (ii) report such amounts to the taxpayer and the Commissioner not later than March 1 of the calendar year following the calendar year of the distribution. If the mutual fund does so, then the shareholders shall report the distribution on their personal income tax returns in the same manner. If the mutual fund does not do so, then the entire amount of the capital gain distribution is included in Part C, Class B gross income.
In addition to any other accounting method that accurately reflects the amount of the capital gain distribution attributable to a class of Part C income, mutual funds may determine the amount of a capital gain dividend attributable to a class by multiplying the amount of the capital gain dividend by a fraction, the numerator of which is the net gain within that class, and the denominator of which is the sum of the net gains (but not the net losses) within all classes of Part C income.
Capital losses incurred by a mutual fund do not flow through to the shareholders.
Example. The Go For Broke Growth Fund pays a $100 capital gain dividend to Sharon Shareholder. Go For Broke has a Class B (5%) net gain of $600,000, a Class C (4%) net loss of $400,000, and a Class D (3%) net gain of $200,000. Thus, disregarding the capital loss, Go For Broke has total Part C capital gains of $800,000 ($600,000 + $200,000). Seventy-five percent of that amount ($600,000 / $800,000) is attributable to Class B (5%) capital gains and the remaining twenty-five percent ($200,000 / $800,000) is attributable to Class D (3%) capital gains. Go For Broke may report to Sharon that seventy-five percent (i.e., $75) of her capital gain dividend is included in Part C, Class B gross income and that twenty-five percent (i.e., $25) of her capital gain dividend is included Part C, Class D gross income.
(10) Flow-Through Entities.
(a) General. Capital gains and capital losses recognized by a partnership, S corporation (other than an S corporation that is organized as a corporate trust), LLC, LLP (other than an LLC or LLP that is treated as a corporation for Massachusetts tax purposes), or other flow-through entity shall be determined under this regulation. Gains and losses that flow through to the owners or beneficiaries of such entities under the personal income tax shall be taken into account by the owners or beneficiaries in proportion to each owner or beneficiary's share of the entity's income and loss as such share is determined for federal income tax purposes under the Code. A flow-through entity may provide its owners or beneficiaries with a breakdown of the various classes of Part C gain or loss in the same time and manner as it reports other items of income and deductions. If the entity does so, then the owners or beneficiaries shall report the gains or losses on their personal income tax returns in the same manner. If the entity does not do so, then all of the entity's long-term gains and long-term losses, other than gains on the sale of collectibles, are Part C, Class B gains or losses.
(b) Entities Holding Collectibles. Where a capital gain or capital loss is recognized on the sale or exchange of an interest in a flow-through entity that holds a capital asset that is a collectible, the portion of the gain or loss attributable to such collectible shall be treated as gain or loss on the sale or exchange of a collectible.
(11) Coordination With Other Personal Income Tax Provisions. In determining (i) whether a taxpayer's income is exempt from the personal income tax by reason of the "No Tax Status" provisions of M.G.L. c. 62, § 5, (ii) whether a taxpayer's personal income tax liability may be reduced by reason of the "Limited Income" provisions of M.G.L. c. 62, §5, (iii) whether a taxpayer qualifies for the college tuition deduction afforded by M.G.L. c. 62, § 3(B)(a)(11), or (iv) whether the taxpayer is affected by any other personal income tax provision that is based on adjusted gross income , Massachusetts adjusted gross income is the sum of the following amounts:
1. Part A adjusted gross income as determined under 830 CMR 62.4.1(5)(a), above;
2. Part B adjusted gross income as determined under M.G.L. c. 62, §2(c); and
3. The sum of each class of net capital gain included in Part C adjusted gross income under 830 CMR 62.4.1(6)(b), above.
Note that under the foregoing provisions, neither Part A nor Part C adjusted gross income can be negative.
REGULATORY AUTHORITY
830 CMR 62.4.1: M.G.L. c. 14, § 16(1); M.G.L. c. 62C, § 3
REGULATORY HISTORY
Date of Promulgation: 3/31/00
Amended: 6/8/01