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The 18 Percent Rate

There is a capital gains rate of 18 percent taxpayers in the 28 percent bracket and above. This is a reduction in the tax rate, although there is a substantial delay before a taxpayer may reap any tax savings. Gains from investments acquired on or after Jan. 1, 2001, and that were held for more than five years will be taxed at a maximum rate of only 18 percent. For investments acquired before 2001, a taxpayer may make a special one-time election with the 2001 return and thereby become eligible for the 18 percent rate. By doing so, taxpayers proceed as though they sold the investment for its Jan. 2, 2001 market value. The taxpayers also act as though they repurchased the investment for the same price on that same day. Resulting capital gains tax from the imaginary profit on the imaginary sale are reported on the 2001 tax return. The benefit of this complicated scheme is that any future appreciation of the value of the asset will be subject to an 18 percent tax rate (instead of 20 percent). To reap this benefit, taxpayers must hold on for at least another five years before selling the asset. This is where the delay comes in. They must wait until at least 2006 to actually realize any tax savings.

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