14.3 Capital Gains, Holding Period, and Virtual Currency
Key Takeaways
- A capital asset is property other than inventory, accounts receivable acquired in the ordinary course, and depreciable or real property used in a trade or business; those carve-outs are ordinary or §1231.
- Holding period of more than one year is long-term; one year or less is short-term; the period generally begins the day after acquisition and includes the disposition date.
- A donee who uses the donor’s basis to compute gain tacks the donor’s holding period; property acquired from a decedent with a §1014 basis is always long-term.
- Virtual currency is treated as property: each unit has basis and a holding period, and using it to buy goods is a realization event.
- The decedent’s final Form 1040 includes income actually or constructively received through the date of death; income in respect of a decedent is not reported on that final return.
14.3 Capital Gains, Holding Period, and Virtual Currency
REG Area IV, Group A asks you to calculate the capital gain that should be included in an individual’s gross income as reported on Form 1040 from transactions including gains from the sale of investments or virtual currencies, assets received as gifts, and assets received from a decedent, and to classify them as long-term or short-term. A separate task is to calculate the income reported in the year of death on the decedent’s final Form 1040. Netting, the statutory ordinary-loss limit, and the rate baskets belong with Area IV.D and IV.F. This section identifies a capital gain, measures it, and dates the holding period.
What is a capital asset — IRC §1221
A capital asset is property held by the taxpayer, except the statutory carve-outs. The three REG must-not-miss exceptions:
- Inventory or property held primarily for sale to customers in the ordinary course of business.
- Accounts or notes receivable acquired in the ordinary course of a trade or business for services or from the sale of inventory.
- Depreciable property used in a trade or business, and real property used in a trade or business. Those assets are §1231 property, not capital assets. Net §1231 gain can be treated as long-term capital gain, but the asset is not a §1221 capital asset, and depreciation recapture can pull all or part of the gain back to ordinary.
A share of publicly traded stock held for investment is a capital asset. A painting hanging in the taxpayer’s home is a capital asset (and, if sold, may also be a collectible). The taxpayer’s delivery truck is not. A dentist’s patient receivables are not. A dealer’s lot of unsold cars is not.
Collectibles (art, antiques, gems, stamps, coins, precious metals) and unrecaptured §1250 gain (straight-line depreciation on real property) are classification flags. They can later face different maximum rates from other long-term capital gain. AICPA’s REG assumption is that you are not tested on specific tax rate percentages or inflation-indexed brackets. Do not memorize those percentages as a REG computation. Flag the character so the tax-computation chapter can place the gain.
Measuring the gain
Amount realized minus adjusted basis equals realized gain or loss. Amount realized is cash plus FMV of other property received plus liabilities from which the seller is discharged. Adjusted basis of purchased investments is generally cost, later increased by commissions and reinvested amounts and decreased by return-of-capital distributions. Gift basis is §1015; inherited basis is §1014. Those computations were Area III.A; this chapter uses the basis you already have.
Report capital gains and losses on Form 8949 and Schedule D, then on Form 1040. A realized gain is generally recognized unless a nonrecognition rule applies. Wash-sale loss deferral is a basis adjustment, not a capital-gain exclusion; see /study-guides/cpa-reg/special-basis/wash-sale-basis.
Holding period — more than one year
Long-term means the asset was held more than one year. Short-term means one year or less. The holding period generally begins the day after acquisition and includes the date of disposition. Bought May 12 of Year 1, sold May 12 of Year 2 is short-term (not more than one year). Sold May 13 of Year 2 is long-term.
Assets received as gifts
When the donee uses the donor’s basis to compute gain, IRC §1223(2) tacks the donor’s holding period onto the donee’s. A donor who held for four years can gift on Monday; the donee who sells at a gain on Friday has long-term capital gain.
When dual-basis loss uses FMV at the date of the gift as the loss basis, tacking typically does not apply; the holding period starts the day after the gift, so a sale two months later at a dual-basis loss is short-term. The dual-basis arithmetic is in /study-guides/cpa-reg/asset-basis/gift-basis. REG’s capital-gain task is the classification.
Worked gift. Donor bought stock January 10, Year 1, for $20,000 and gifts it on September 1, Year 4, when FMV is $50,000. Donee sells December 1, Year 4, for $52,000. Gain is $32,000 using the $20,000 carryover. The donor’s holding period tacks, so the gain is long-term.
Assets received from a decedent
Property that takes a §1014 basis is treated as held more than one year. Inherited capital assets are always long-term, even if the heir sells the next morning. The decedent’s holding period does not matter. The heir’s calendar does not matter.
Worked inherited stock. Decedent’s basis was $20,000. FMV at death is $80,000, which is the heir’s basis under §1014. The heir sells three months later for $83,000. Recognized gain is $3,000. Character is long-term capital gain, not short-term, because of the automatic more-than-one-year rule. The same stock gifted during life would have tacked only if the donee used the donor’s basis for gain; inherited property does not use that branch. Details of step-up, step-down, and IRD are in /study-guides/cpa-reg/asset-basis/inherited-basis.
Virtual currency is property
The IRS treats convertible virtual currency as property, not as foreign currency and not as a bank deposit (Notice 2014-21). Each unit (or fraction) has its own basis and holding period.
- Purchased as an investment and later sold: capital gain or loss. Bought March 1, Year 1 for $40,000, sold March 15, Year 2 for $55,000 → $15,000 long-term capital gain.
- Used to buy goods or services: that is a sale of the units. Amount realized is the FMV of what was received (or of the virtual currency, if clearer). Worked. A taxpayer uses bitcoin with an $8,000 basis, held 18 months, to buy equipment worth $12,000. The taxpayer has $4,000 long-term capital gain, and the equipment’s basis is $12,000.
- Received as payment for services: ordinary compensation income equal to FMV on the receipt date. That FMV becomes basis. The holding period starts the day after receipt. A later sale can be capital.
- A hard fork or airdrop with dominion and control can be ordinary income when received (Rev. Rul. 2019-24). Mining and staking rewards are generally ordinary income at FMV.
Specific identification of lots is allowed if records identify the units sold. Do not treat a same-day crypto repurchase as an automatic §1091 wash sale; §1091 is a stock-or-securities statute. Draft proposals to extend wash-sale treatment to digital assets were not enacted in the One Big Beautiful Bill Act (signed July 4, 2025). REG tests current law.
Year of death — the decedent’s final Form 1040
The decedent files (or has filed) a final Form 1040 covering January 1 through the date of death. A cash-method decedent includes only amounts actually or constructively received through that date. Accrued but unpaid interest, unpaid wages, and declared but unpaid dividends are IRD, reported by the estate or heir when received, not on the final 1040.
A sale the decedent closed before death is on the final return, with the decedent’s basis and holding period. A sale the estate or heir closes after death is their sale, generally using §1014 basis and the automatic long-term holding period. Under §706, a partnership year generally closes with respect to a deceased partner, so the final 1040 includes the partner’s distributive share and guaranteed payments allocable through the date of death.
| How acquired | Basis used for gain | Holding period for a sale 3 months later |
|---|---|---|
| Purchased 3 months ago | Cost | Short-term |
| Purchased 5 years ago | Cost | Long-term |
| Gift; sell at a gain using donor’s basis | §1015 carryover | Tacks — long-term if donor’s period plus donee’s exceeds one year |
| Inherited (non-IRD) | §1014 FMV | Always long-term |
| Virtual currency purchased 18 months ago | Cost | Long-term capital gain or loss |
| Virtual currency received as wages yesterday, sold today | FMV at receipt | Short-term (and the receipt itself was ordinary) |
An heir inherits publicly traded stock. Fair market value at the date of death is $80,000, which is the heir’s §1014 basis. The heir sells the stock three months later for $83,000. What is the result?
A taxpayer uses bitcoin with an $8,000 adjusted basis, held for 18 months as an investment, to buy equipment worth $12,000. What is the federal income-tax result?
Which asset is a capital asset under IRC §1221?