98-473 E
CRS Report for Congress
Received through the CRS Web
Individual Capital Gains Income:
Legislative History
Updated June 29, 1998
Gregg A. Esenwein
Specialist in Public Finance
Economics Division
Congressional Research Service ˜ The Library of Congress

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ABSTRACT
Since the enactment of the modern individual income tax in 1913, the appropriate taxation of
capital gains income has been a perennial topic of debate in Congress. Almost immediately
after passage of the Revenue Act of 1913, legislative steps were initiated to change the tax
treatment of capital gains and losses. These legislative initiatives continue today with the
latest change in the taxation of capital gains income occurring as recently as 1997. This
report provides a brief history of the major legislative changes that have affected the taxation
of capital gains income and losses.

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Individual Capital Gains Income: Legislative History
Summary
Since the enactment of the individual income tax in 1913, the appropriate
taxation of capital gains income has been a perennial topic of debate in Congress.
Almost immediately legislative steps were initiated to change and modify the tax
treatment of capital gains and losses. The latest change in the tax treatment of
individual capital gains income occurred in 1997. Legislative initiatives continue, with
several bills currently before Congress.
Capital gains income is often discussed as if it were somehow different from
other forms of income. Yet, for purposes of income taxation, it is essentially no
different from any other form of income from capital. A capital gain or loss is merely
the result of a sale or exchange of a capital asset. An asset sold for a higher price than
its acquisition price produces a gain, an asset sold for a lower price than its acquisition
price produces a loss.
Ideally, a tax consistent with a theoretically correct measure of income would be
assessed on real (inflation-adjusted) income when that income accrues to the taxpayer.
Conversely, real losses would be deducted as they accrue to the taxpayer. In addition,
under an ideal comprehensive income tax, any untaxed real appreciation in the value
of capital assets given as gifts or bequests would be subject to tax at the time of
transfer.
Since 1913, at least twenty major legislative acts have affected the taxation of
capital gains income and loss. Over this period, the definition of what constitutes a
capital asset has been steadily expanded. There have been periods when capital losses
were not deductible, periods when they were fully deductible, and periods when they
were only partially deductible. Likewise, there have been periods when capital gains
income has been partially taxed, fully taxed, or even excluded from tax.
The logical question to ask after reviewing past legislative changes is why after
80 years is there still controversy over the appropriate means of taxing capital gains
income and loss? From a purely economic perspective, the appropriate means of
taxing gains and losses from capital assets under a tax that measures income
comprehensively is relatively clear. Indeed, workable procedures for an approach
more consistent with the ideal tax treatment have been outlined in great detail in the
past.

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Contents
Current Law Tax Treatment — 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
An Overview of Legislative Changes since 1913 . . . . . . . . . . . . . . . . . . . . . . . . 3
Revenue Act of 1913 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Revenue Act of 1916 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Revenue Act of 1918 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Revenue Act of 1921 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Revenue Act of 1924 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Revenue Act of 1932 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
National Industrial Recovery Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Revenue Act of 1934 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Revenue Act of 1938 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Revenue Act of 1942 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Revenue Act of 1943 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Revenue Act of 1951 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Revenue Act of 1964 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Tax Reform Act of 1969 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Tax Reform Act of 1976 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Revenue Act of 1978 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Crude Oil Windfall Profit Tax Act of 1980 . . . . . . . . . . . . . . . . . . . . . . . . . 9
Economic Recovery Tax Act of 1981 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Deficit Reduction Act of 1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Tax Reform Act of 1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Revenue Reconciliation Act of 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Taxpayer Relief Act of 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Prospects for the Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

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Individual Capital Gains Income:
Legislative History
Since the enactment of the individual income tax in 1913, the appropriate
taxation of capital gains income has been a perennial topic of debate in Congress.
Almost immediately after the passage of the Revenue Act of 1913, legislative steps
were initiated to change and modify the tax treatment of capital gains and losses.
These legislative initiatives continue today with the latest change in the tax treatment
of individual capital gains income occurring in legislation passed as recently as 1997.
Capital gains income is often discussed as if it were somehow different from
other forms of income. Yet, for purposes of income taxation, capital gains income
is essentially no different from any other form of income from capital, such as interest
or dividend income. A capital gain or loss is merely the result of a sale or exchange
of a capital asset. If the asset is sold for a higher price than its acquisition price, then
the transaction produces a capital gain. If an asset is sold for a lower price than its
acquisition price, then the transaction produces a capital loss.
Ideally, a tax consistent with a theoretically correct measure of income would be
assessed on real (inflation-adjusted) income when that income accrues to the taxpayer.
Conversely, real losses should be deducted as they accrue to the taxpayer. In
addition, any untaxed real appreciation in the value of capital assets given as gifts or
bequests should be subject to tax at the time of transfer.
Under the current income tax, however, nominal (non-inflation adjusted) capital
gains income is taxed when it is realized (sold or exchanged) by the taxpayer. Capital
losses (within certain limits) are also deducted on a nominal basis when they are
realized by the taxpayer. Currently, the untaxed appreciation in the value of capital
assets transfered at death is not subject to tax.
Obviously, the current law tax treatment of capital gains and losses is at variance
with the approach that would be applied if income were measured in a theoretically
correct manner. Putting theory into practice, however, is not easy. Appropriately
taxing income and losses from the sale of capital assets involves difficulties such as
differentiating between real and nominal gains and losses, and accounting for tax
deferral. Moreover, the taxation of capital gains income affects resource allocation,
the distribution of the tax burden, and the revenue yield of the individual income tax.1
1 These issues are analyzed in previously published CRS Reports. See: U.S. Library
of Congress. Congressional Research Service. The Neutral Taxation of Capital Gains
Income Under the Individual Income Tax. CRS Report 94-395E , by Gregg A. Esenwein.
Washington, May 1994. Capital Gains Taxes: An Overview. Report No. 96-769E, by Jane
(continued...)

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CRS-2
Since 1913, there has been considerable legislative change in the tax treatment
of capital gains income and loss. This report provides a brief history of those
changes. To establish a perspective, a brief overview of the current law tax treatment
of capital gains income and losses is presented first. The remainder of the report then
focuses on the legislative changes that have affected the tax treatment of capital gains
income and losses since 1913.
Current Law Tax Treatment — 1998
Under current law, capital assets are separated into four categories. Assets that
have been held for 12 months or less are considered short-term assets. Assets that
have been held for longer than 12 months but less than 18 months are considered mid-
term assets. Collectibles (art work, antiques, coins, stamps, etc.) also fall into this
mid-term category. Assets held longer than 18 months are considered long-term
assets. The fourth category of capital gains assets includes the portion of gain
attributable to previously taken depreciation deductions on section 1250 property
(depreciable real estate).
Short-term capital gains are taxed at regular income tax rates. Mid-term capital
gains are taxed at regular income tax rates up to a maximum of 28%. Long-term
capital gains are taxed at a maximum tax rate of 20%. The tax rate is 10% for long-
term gains that would have been taxed at a 15% regular tax rate. The unrecaptured
section 1250 gain attributable to depreciation deductions is taxed at a maximum tax
rate of 25%.2
Effective for taxable years beginning in 2001, assets that have been held for at
least 5 years and would have been taxed at a 10% tax rate will be taxed at an 8% tax
rate. For assets which are held more than five years and whose holding period begins
after December 31, 2000, the maximum tax rate will be 18% rather than 20%.
Net capital losses are deductible against up to $3,000 of ordinary income, that
is, non-capital gain income. Any portion of the net loss in excess of the $3,000 limit
can be carried forward and used to offset gains in succeeding tax years. Excess net
losses can be carried forward indefinitely and without limit on the amount of losses
that can be carried forward.
Under current law, taxpayers are allowed to exclude from taxable income up to
$500,000 ($250,000 in the case of single returns) of the gain from the sale of their
principal residences. To qualify the taxpayer must have owned and occupied the
residence for at least two of the previous five years prior to the date of sale.
(...continued)
1
G. Gravelle. Washington, September 1997.
2 For more information on depreciation recapture see: U.S. Library of Congress.
Congressional Research Service. Depreciation Recapture After the Taxpayer Relief Act of
1997. CRS Report 97-858 E, by Gregg A. Esenwein. Washington, September 1997.

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CRS-3
Under current law, capital gains transferred at time of death are not subject to
tax. On transfer at death, the basis of the asset (original cost plus changes in the value
due to improvements or depreciation) is stepped up to the market value of the asset
on the date of death.
An Overview of Legislative Changes since 19133

Revenue Act of 1913
The Revenue Act of 1913, enacted after the adoption of the Sixteenth
Amendment to the Constitution, established the framework for the current individual
income tax. It did not include any specific provisions covering the tax treatment of
capital gains income. Capital gains on transactions entered into for profit were
considered regular income and were taxed in full at normal tax rates. Capital losses,
unless they were losses specifically associated with a taxpayer’s trade or business,
were not deductible.
Revenue Act of 1916
The Revenue Act of 1916 was primarily concerned with raising revenue through
a general increase in the marginal tax rates applicable to individuals. In addition,
however, it contained provisions which allowed deductions for capital losses on
transactions not associated with a taxpayer’s primary trade or business. Deductible
capital losses, however, could not exceed a taxpayer’s capital gains income.
Revenue Act of 1918
The Revenue Act of 1918 was one of the largest tax increases in American
history. An important change related to capital gains income involved the removal of
the restriction on deductible losses. For the first time, capital losses in excess of
capital gains were deductible against ordinary income.
Revenue Act of 1921
The Revenue Act of 1921 marked a significant change in the tax treatment of
capital gains income. For the first time, capital assets were specifically defined in the
individual income tax code and were separated into long and short term assets.
Assets held longer than two years were considered long-term while assets held two
years or less were considered short-term.
3 The information contained in this report on legislative changes through 1949, draws
from two primary sources. The first source is, The Federal Income Tax, by Roy G. and
Gladys C. Blakey, published in 1940. The second source is, Legislative History of
Treatment of Capital Gains Under the Federal Income Tax, 1913-1948, by Anita Wells,
National Tax Journal, March 1949. For legislative changes after 1949, the primary sources
of information include the Conference Committee Reports and the General Explanations of
the individual tax acts prepared by the Joint Committee On Taxation.

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CRS-4
Gains on short-term assets were included in income and taxed at normal tax
rates. Losses on short-term assets were deductible against ordinary income.
Net gains on long-term assets were, at the taxpayer’s election, subject to a flat
tax of 12.5% instead of taxes assessed at the regular and surtax rates. However, to
qualify for this election, the total tax owed by the taxpayer including regular taxes and
taxes on long-term capital gains could not be less than 12.5% of the taxpayer’s total
net income. If the combined tax fell below 12.5% of net income then taxes on long-
term capital gains were assessed at regular rates.
Losses on assets held longer than two years were deductible in full against any
other type of income. This system, however, created an asymmetrical treatment of
long-term gains and losses. Long-term losses were deductible in full at regular
income tax rates, which, including surtax rates, went as high as 56%. On the other
hand, long-term gains were taxed at only 12.5%, which meant that long-term losses
could be deducted at much higher rates than those applied to long-term gains.
Revenue Act of 1924
The Revenue Act of 1924 corrected the imbalance in the tax treatment of long-
term capital losses created by the 1921 Act, by establishing a symmetrical treatment
between long-term gains and losses. A tax credit of 12.5% was allowed for net long-
term losses. If this produced a tax that was less than the tax if net long-term losses
were deducted at regular rates, however, then net long-term losses would have to be
deducted at regular rates.
Other changes in the 1924 Act included repeal of the provision that prohibited
the use of the alternative 12.5% rate on long-term gains if it produced a total tax
liability on net income below 12.5%.
The definition of a capital asset was also changed by eliminating the provisos that
assets be acquired for profit or investment in order to be considered capital assets.
This change allowed taxpayers selling their residential property to treat the resulting
gains or losses as capital gains or losses.
Revenue Act of 1932
This Act changed the income tax treatment of short-term (held two years or less)
losses on sales of stocks and bonds. Short-term losses on stocks and bonds were
deductible only to the extent of gains from the sale of these same types of assets.
Losses that exceeded gains in a given year could be carried forward to the next year
and used to offset gains from the sales of stocks and bonds in that year. (This loss
carry forward was repealed, prior to its becoming effective, by the National Industrial
Recovery Act.)
National Industrial Recovery Act
One provision of this 1933 legislation repealed the loss carry-forward for short-
term losses on the sale of stocks and bonds.

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CRS-5
Revenue Act of 1934
The Revenue Act of 1934 instituted a sliding inclusion scale for the recognition
of gains and losses based on how long a capital asset had been held. The gain or loss
to be included for income tax purposes was 100% if the asset had been held less than
one year, 80% if the asset had been held less than two years, 60% if the asset had
been held less than 5 years, 40% if the asset had been held less than 10 years, and
30% if the asset had been held longer than 10 years.
Net recognized gains were included in income and taxed at normal and surtax
rates. Recognized capital losses were netted against recognized capital gains. If
losses exceeded gains, then losses up to the amount of recognized gains plus $2,000
were deductible.
Revenue Act of 1938
The 1938 Act included major changes in the tax treatment of gains and losses
from the sale of capital assets. Gains and losses were classified as short-term if the
capital asset had been held 18 months or less and long-term if the asset had been held
for longer than 18 months.
Short-term losses were deductible up to the amount of short-term gains. Short-
term losses in excess of short-term gains could be carried forward for one year and
used as an offset to short-term gains in that succeeding year. The carryover could not
exceed net income in the taxable year the loss was incurred. Net short-term gains
were included in taxable income and taxed at regular tax rates.
Long-term gains and losses were subject to two alternative methods of
determining the tax on those gains or losses. Under the first method, a percentage of
long-term gains or losses was recognized and included in taxable income and taxed
at regular tax rates. If the asset had been held for more than 18 months but for 24
months or less, then 66.66% of the gain or loss was recognized. If the asset had been
held for longer than 24 months, then 50% of the gain or loss from the sale of that
asset was recognized and included in taxable income. Net recognized long-term
losses could be deducted against other forms of income without limit.
The 1938 Act also adopted an alternative method of taxing long-term gains and
losses (assets held longer than 18 months) that was calculated as follows. Regular
taxes on taxable income excluding any net long-term capital gains would be
computed. To this partial tax, a flat tax of 30% of the net long-term capital gain
would be added. If this alternative method produced a tax liability that was less than
the tax assessed under the standard method, then the taxpayer could pay the lower
amount of tax.
The 30% flat tax was applied against recognized net long-term gains. That
means the maximum tax on assets held longer than 18 months but less than 24 months
would be 20% (30% of the 66.66% of the gain that was recognized), and the
maximum tax on assets held longer than 24 months would be 15% (30% of the 50%
of the gain that was recognized).

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CRS-6
The alternative tax treatment of net long-term capital losses worked in a similar
fashion. Regular taxes on taxable income excluding any net long-term capital losses
would be calculated. From this partial tax an amount equal to 30% of the net long-
term capital gain would be deducted. If this alternative method produced a tax that
was greater than the tax assessed under the standard method, then the taxpayer was
obligated to pay the higher amount of tax.
A final change in the 1938 Act involved a change in the definition of capital
assets. After 1938, depreciable property used in a trade or business was no longer
considered a capital asset for income tax purposes. As a result, losses on this type of
property were no longer subject to the limitations on losses on the sale of capital
assets and hence, were deductible in full.
Revenue Act of 1942
This wartime tax legislation made several changes in the individual income tax
treatment of capital gains and losses. These changes included a reduction in the
holding period, a slight increase in the tax rate on long-term gains, a limit on the loss
offset against ordinary income, and creation of a 5-year carryforward for losses.
Under prior law, to qualify as a long-term capital asset, the asset had to be held
for over 18 months. The 1942 Act reduced this holding period to 6 months. Gains
on assets held less than 6 months were included in taxable income and taxed at regular
tax rates.
The 1942 Act increased the tax rate on long-term gains. Under prior law, the
alternative tax rate on recognized long-term gains was a flat 30%, which resulted in
a maximum tax rate on long-term gains of 15% (the recognized portion of the gain,
50%, taxed at a flat 30% rate). The 1942 Act increased the alternative tax rate on
long-term gains to 50%, which in turn increased the maximum tax rate on long-term
gains to 25% (the recognized portion of the gain, 50%, taxed at a flat 50% rate).
The 1942 Act also changed the tax treatment of capital losses in two significant
ways. First, it consolidated the tax treatment of short- and long-term losses. Second,
it established a $1,000 limit on the amount of ordinary income that could be offset by
combined short- and long-term net capital loss. Finally, it created a 5-year carry
forward for net-capital losses that could be used to offset capital gains and up to
$1,000 of ordinary income in succeeding years.
New provisions in the 1942 Act changed the tax treatment of certain business
property. Under these new provisions in Section 117(j) of the tax code, gains on the
sale or involuntary conversion of real and depreciable property used in a trade or
business would be treated as capital gains. Losses, however, would continue to be
treated as ordinary losses.
Revenue Act of 1943
Through expansion of provisions in Section 117(j) and 117(k), the Revenue Act
of 1943 extended capital gains tax treatment to timber. Owners of timber or those

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CRS-7
with contracts to cut timber were permitted to treat the income from the sale of the
timber as capital gains income, while losses were treated as ordinary losses.
Revenue Act of 1951
The Revenue Act of 1951 made three changes affecting the tax treatment of
capital gains and losses. First, under Sections 117(j) and 117(k) it extended capital
gains tax treatment to the sales of land with unharvested crops, sales of livestock, and
coal royalties.
Second, it amended the tax treatment of gains and losses that, since 1942, had
allowed taxpayers to use $1 in short-term losses to offset $2 in long-term gains.
Under prior law, since only 50% of a long-term gain was included in income, allowing
short-term losses to offset recognized long-term gains (the 50% included in taxable
income) on a dollar for dollar basis created a situation where $1 of short-term losses
was actually offsetting $2 of long-term gain. The 1951 Act eliminated this two for
one offset.
Finally, the 1951 Act allowed a taxpayer to “roll over” the capital gains he
received from the sale of his personal residence if, within one year, the taxpayer used
the gain to acquire a new residence of equal or greater value.
Revenue Act of 1964
The Revenue Act of 1964 made three changes in the tax treatment of capital
gains and losses. It extended, under Sections 117(j) and 117(k), capital gains tax
treatment to iron ore royalties. It also repealed the five-year loss carryover for capital
losses and replaced it with a unlimited loss carryover. Net losses, however, were still
deductible against only $1,000 of ordinary income in any given year.
The 1964 Act introduced the first exclusion for the capital gain arising from the
sale of a principal residence. Under these new provisions, the first $20,000 of capital
gain from the sale of a personal residence by a taxpayer aged 65 years or older who
had owned the house for at least 8 years and lived in the house for at least 5 years was
excluded from tax.
Tax Reform Act of 1969
The Tax Reform Act of 1969 made several major changes in the tax treatment
of capital gains and losses. It increased the alternative tax rate on large amounts of
capital gains income, it restricted the deductibility of long-term losses, and it created
an add-on minimum tax on tax preference items, one of which was the excluded
portion of long-term gains.
The Act eliminated the 50% alternative tax rate on net-long term gains in excess
of $50,000 for joint returns ($25,000 for single returns). This alternative tax rate on
long-term gains had originally been enacted in 1938 and was modified in 1942.

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CRS-8
Net-long term gains in excess of these amounts were taxed at regular income tax
rates, which at the time went as high as 70%. Hence, the maximum rate on long-term
capital gains rose from 25% under prior law, to 35% (50% of gain included in taxable
income taxed at a 70% rate). This change was phased-in over a 3-year period and
was fully in effect by 1972.
The Act imposed a 50% limitation on the amount of net long-term losses that
could be used to offset ordinary income. Under prior law, even though only 50% of
net long-term gains were subject to tax, net long-term losses could be deducted in full
and used to offset up to $1,000 of ordinary income. The Act repealed this provision
and established a new 50% limit on the deductibility of net long-term losses, subject
to the same $1,000 limit on ordinary income. In addition, the law specified that the
nondeductible portion of net long-term losses could not be carried forward to be
deducted in succeeding years.
The 1969 Act created a new 10% minimum tax on tax preference items. This
tax was adopted because of concern that wealthy taxpayers were escaping taxation
through excessive use of tax preferences. The tax was 10% of the value of all tax
preference items in excess of a $30,000 basic exemption amount and regular income
taxes owed. Final tax liability was determined by adding the minimum tax to the
regular income taxes owed. The excluded portion of net long-term capital gains was
considered a tax preference item for purposes of this add-on minimum tax.
Finally, the Act capped the tax rate on personal service income at 50% (regular
tax rates went to 70%). However, the 1969 Act required that the amount of personal
service income eligible for treatment under this maximum tax rule be offset on a dollar
for dollar basis by the excluded portion of capital gains income.
Tax Reform Act of 1976
The Tax Reform Act of 1976 changed the length of time a capital asset had to
be held to qualify for preferential treatment, increased the capital gains loss offset
against ordinary income, increased the minimum tax rate, and for the first time
eliminated the practice of stepping up the basis of property passing from a decedent
to an heir.
Prior to the 1976 Act a capital asset had to be held only 6 months to qualify for
long-term capital gains treatment. The 1976 Act increased the holding period to nine
months for tax year 1977 and to one year for tax years beginning after 1977.
Under prior law, net capital losses could offset up to $1,000 of ordinary income.
The 1976 Act increased the capital loss offset to $2,000 in 1977 and $3,000 for tax
years starting after 1977.
Another change in the 1976 Act affecting capital gains income was an increase
from 10% to 15% in the add-on minimum tax rate on tax preference items.
The final change in the 1976 Act involved the elimination of the practice of
stepping up the basis of property when it was passed from generation to generation.
Under prior law, the basis of property passed from a decedent to an heir was stepped

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CRS-9
up to reflect the fair market value of the property on the date of death. The stepped
up basis was then used to determine the amount of gain or loss occurring when the
property was sold by the heirs. The 1976 Act changed this practice so that the basis
of property passed from a decedent to an heir would no longer be stepped up but,
rather, the basis of the property would be carried over and remain unchanged from the
basis when held by the decedent. These new rules were to become effective for
property transferred after December 31, 1976.
Revenue Act of 1978
The 1978 Act changed the taxation of capital gains and losses in several ways.
First, it repealed the 25% alternative tax on an individual’s first $50,000 of net-long
term gain. Second, it increased the exclusion for net long-term capital gain from 50%
to 60%. Third, it decreased the age limit for eligibility for the one-time exclusion of
gain from the sale of a principal residence from 65 to 55 years. In addition, it
increased the amount of gain eligible for the one-time exclusion to $100,000.
The Act also affected the tax treatment of capital gains and losses by introducing
a new alternative minimum tax for individuals in addition to the old add-on minimum.
The excluded portion of capital gains income was deleted from the list of tax
preferences subject to the add-on minimum tax. Instead, the excluded portion of
capital gains income along with certain itemized deductions were added back to gross
income to form the tax base for the alternative minimum tax. The tax rates for the
alternative minimum tax went up to 25% on alternative minimum taxable income in
excess of $100,000. If the tax computed under the alternative minimum tax was
larger than a taxpayer’s regular and add-on minimum tax, the taxpayer was obligated
to pay the alternative minimum tax.
The 1978 Act removed the excluded portion of capital gains income as an offset
to the amount of personal service income eligible for the treatment under the
maximum tax rate rule. (Since 1969, the tax rate on personal service income was
capped at 50% even though regular tax rates went as high as 70%. The excluded
portion of capital gains income, along with other tax preference items, reduced, on
a dollar-for-dollar basis, the amount of personal service income that was subject to
this cap.)
Finally, the 1978 Act postponed the implementation of the carryover basis rules
enacted in the 1976 Act. Under the 1978 Act, the carryover basis rules would apply
to property transferred after December 31, 1979.
Crude Oil Windfall Profit Tax Act of 1980
This Act repealed the carryover basis provisions enacted in the 1976 Reform
Act. In its place, it re-established the process of stepping up the basis of property to
reflect its fair market value at the time of death of the decedent.

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CRS-10
Economic Recovery Tax Act of 1981
The Economic Recovery Tax Act increased from $100,000 to $125,000 the
amount of capital gain eligible for the one-time exclusion from tax on the sale of a
principal residence by a taxpayer aged 55 years or older.
Indirectly, because of reductions in the top personal income tax rate from 70%
to 50%, the 1981 Act also reduced the maximum tax rate on long-term capital gains
income from 28% to 20% (40% of long-term gain included in taxable income times
50% tax rate).
Deficit Reduction Act of 1984
This Act temporarily reduced the holding period from 12 months to 6 months
for determining whether an asset was considered a short-term or long-term capital
asset. Assets held longer than 6 months qualified for the preferential tax treatment
accorded long-term capital gains income.
This provision was effective for assets acquired after June 22, 1984, and before
January 1, 1988. After 1988, the holding period to qualify as a long-term capital asset
reverted back to 12 months.
Tax Reform Act of 1986
The Tax Reform Act of 1986 repealed the net capital gain deduction for
individuals. Both short-term and long-term capital gains income were included in
taxable income and taxed in full at regular income tax rates. Statutory rates under the
Act were reduced from a maximum of 50% to 33% (28% statutory rate plus 5%
surcharge).
The tax treatment of capital losses was unchanged. Losses could be netted
against gains and any excess losses could be deducted against up to $3,000 of
ordinary income. Net losses in excess of this amount could be carried forward
indefinitely.
Revenue Reconciliation Act of 1990
This Act established a 28% maximum tax rate on net-long term capital gains
income. Under the Act, the maximum statutory income tax rate was set at 31%.
Taxpayer Relief Act of 1997
This Act made multiple changes to the tax treatment of capital gains income.
First, it lowered the maximum tax rate on long-term (assets held longer than 18
months) capital gains income to 20% (10% for taxpayers in the 15% tax rate bracket
for regular income tax purposes). Second, it kept the maximum capital gains tax rate
on assets held more than 12 months but less than 18 months at 28%. Third, it kept
a 28% maximum tax rate on the gain from the sale of collectibles held longer than 12
months. Fourth, it instituted a 25% tax rate for the gain resulting from the sale of

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depreciable real property (section 1250 property) attributable to previous
depreciation deductions. Fifth, it reduced, beginning for tax years after 2000, the
maximum tax rate on the gains from property held longer than 5 years. Under this
provision, the maximum rate would fall to 18% (8% for taxpayers who would
ordinarily pay the 10% rate).
Finally, the Act repealed both the rollover provisions and the one-time exclusion
provision for the sale of owner occupied housing. In its place it established an
exclusion of $500,000 ($250,000 in the case of singles) on the gain from the sale of
a personal residence. The new exclusion would only be allowed once every two
years.
The Act also contained conforming amendments establishing these maximum
capital gains tax rates as the maximum tax rates for capital gains income under the
alternative minimum tax.
Prospects for the Future
It is highly unlikely that the rules governing the taxation of capital gains income
will remain unchanged for any length of time. The second session of the 105th
Congress has seen the introduction of several bills concerning the tax treatment of
capital gains income. In late June the House passed the IRS restructuring bill (H.
Rept. 105-599) which contained provisions reducing the long-term holding period for
capital gains income from 18 to 12 months. The Senate will consider the bill after the
July recess. In addition, Speaker of the House Gingrich has recently indicated his
desire to reduce the maximum tax rate on capital gains income to 15%.
The logical question to ask after reviewing past legislative changes is why after
80 years are we still unable to agree on the appropriate means of taxing capital gains
income? From a purely economic perspective the appropriate way of taxing capital
gains income and loss is relatively clear. Under a tax system that measures income
in a comprehensive manner, real capital income and loss would be treated as regular
income and taxed or deducted as it accrues to the taxpayer. Untaxed real gains would
be taxed when transferred as gifts or bequests.
Several workable procedures for an approach more consistent with a
comprehensive measure of income have been proposed in the past. Putting theory
4
into practice, however, would make the tax code more complex. Under a more
comprehensive approach to taxing income, taxing capital gains income and losses
would involve differentiating between real and nominal gains and losses and
accounting for tax deferral.
4 For example see: U.S. Treasury Department. Blueprints for Basic Tax Reform.
Washington. January 1977. Tax Reform for Fairness, Simplicity, and Economic Growth.
Washington. November 1984.

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