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§ 2.16 CAPITAL ASSETS, GAINS, AND LOSSESOrdinary income is accorded ordinary income tax treatment. This means thatthe regular income tax rates are applicable to ordinary income. Likewise, on thesale or exchange of a capital asset, any gain generally is included in income. Capitalgain has, however, historically been given preferential tax treatment. Forexample, prior to tax law changes in 1986, individuals had an effective capitalgains tax rate of 20 percent and corporations had a capital gains tax rate of 28 percent.The Tax Reform Act of 1986 repealed the provisions granting reduced ratesfor individuals for capital gains, fully effective beginning in 1988, and the specialcapital gains tax rates for corporations was repealed. The maximum tax rate onthe net long-term capital gain incurred by an individual was 28 percent, unlessthe individual’s maximum tax rate was less. Nonetheless, the concept of capitalgains in the federal tax law was retained, foretelling the day when differentialcapital gains rates were reinstated. That occurred as the consequence of a majortax law change enacted in 1997. The essence of this revision to law was that theholding periods for determining what is a long-term capital asset were increasedand the tax rates for long-term capital gains were reduced.The net capital of an individual (as well as trusts and estates) is thus taxed atrates lower than the rates applicable to ordinary income. Net capital gain is theexcess of the net long-term capital gain for the tax year over the net short-termcapital loss for the year. Gain or loss is treated as long-term if the asset is held formore than one year. 77In general, the maximum rate of tax on the adjusted net long-term capitalgain of an individual was 20 percent. Any adjusted net capital gain received byan individual in the 15 percent bracket was taxed at a 10 percent rate. These ratesapplied for purposes of both the regular tax and the alternative minimum tax. 78The foregoing 10 percent/8 percent and 20 percent/18 percent capital gainrate rules were reduced to 5 percent (0 percent beginning in 2008), and mostother capital gain to 15 percent, in connection with gain taken into account afterMay 5, 2003. 79(c) Long- and Short-Term Capital Gains and LossesGains and losses from capital assets are classified as either long- or short-term.The term refers to the period of time a capital asset has been held by the taxpayer.The federal tax law provides rules for determining the length of time capitalassets have been held. 80Long-term capital gains and losses means gains or losses from capital assetsheld for more than one year. 81 Short-term capital gains and losses means gains orlosses from capital assets held for not more than one year. 82 Special netting rulesapply to these capital gains and losses. 8377 See § 2.16(c).78 As to the latter, see § 2.18.79 JGTRRA § 301. This change is reflected in IRC § 1(h)(1)(B), (h)(1)(C), (h)(2), and (h)(9).80 IRC § 1223.81 IRC § 1222(3), (4).82 IRC § 1222(1), (2).83 IRC § 1222. 49