July 24, 2013

Q: I have a question regarding Sch D.  In the exercise line 7 was included as part of the global cash flow.  I know Capital Loss carryovers should not be included, but what about if there are Long term capital gains and losses?  If line 15 is completed should that amount be considered in the global cash flow?
 
A: There are a couple of issues to sort through.

In constructing an historical personal cash flow statement, we would include a short-term capital gain if it were a cash capital gain, and would include a short-term capital loss if it were a cash capital loss.  The key is whether the gain or loss is a cash gain or loss.  Since the maximum loss that can presently be claimed is $3,000, we end of digging to determine the actual cash loss associated with the reported $3,000 loss.    As you noted, we used the actual short-term capital loss of $96,010 at Line 7 rather than the maximum deductible loss of $3,000 for Fritz Schumacher.

The same holds with respect to a long-term capital gain or loss, i.e., we have to determine if it is a cash capital gain or loss.  Usually, we get good information from Line 8 and Line 13 and we can figure out the actual long-term cash capital gain or loss, just as we did for the short-term capital loss at Line 7.  The problem is with a long-term gain or loss reported at the other lines on Schedule D, such as Lines 11, 12, and 14. Frequently, amounts reported there are a taxpayer's pro-rata share of long-term gains or loss experienced by his or her company that the taxpayer must report.  As a result, such gains or losses are not cash to the taxpayer but, rather, cash to a partnership, S Corp, and so on.  If so, we disregard them completely.  This is a difficult area to figure out, so review all the underlying supporting schedules, such as Form 4797.

In constructing a projected personal cash flow statement, it usually makes sense to disregard capital gains and losses completely, since it's virtually impossible to estimate a gain or a loss - either short-term or long-term.  Consequently, in looking forward we simply lay capital gains and losses aside.