Possible Loophole in New Capital Gain Rules

The new, lower 8%/18% capital gain tax rates go into effect January 1 for assets owned more than five years. Taxpayers in the 15% tax bracket for ordinary income will receive a special 8% capital gain tax rate for gains on capital assets owned more than five years. The five-year holding period for these taxpayers is effective immediately, so 15% taxpayers who owned assets in December 1995 can sell these assets on January 1, 2001, and take advantage of the low rate.

Taxpayers in higher tax brackets must begin a five-year holding period on January 1, 2001 in order to use the new 18% capital gain tax rate, so these taxpayers won't see the benefit of the new law until their tax return is filed for 2006.

But consider this scenario. A taxpayer in a high tax bracket has owned stock for more than five years and this stock has appreciated in value. He gifts the stock to his 16-year-old child who is in the 15% tax bracket. The son acquires the father's basis and acquisition date in the gifted stock, sells the stock on January 1, and pays 8% tax on the gain.

It would seem that this situation will provide taxpayers in higher brackets with the opportunity to sell appreciated assets in January for a bargain price. Please share your comments on this issue.