If you wish to refresh your memory on the rates prior to the 2003 Act, you might want to read an article by Joe Tancer, Capital Gains Taxes – after Year 2000.

In this article, we'll highlight just the current changes.

The first point to remember is that the new rates are effective for capital gains recognized on or after May 6, 2003. Since these changes are not retroactive to January 1, old rates still apply to sales made between January 1 and May 5, 2003.

What are the new rates effective on or after May 6, 2003?

• The new 15% rate replaces the 20% long–term capital gains rate.
• The new 5% rate replaces the 10% long–term capital gains rate. This rate only applies to those individuals who are in the lowest regular income tax bracket.
• The maximum rates for gains on "collectibles" and certain small business stock did not change: both are still 28%.
• The maximum rate for gains – only to the extent of prior depreciation - from sale of depreciable realty did not change: it is still 25 %.

• The Five–Year Holding Period, previously required for a reduced capital gains rate, no longer applies. All individuals are now eligible for the 15% rate (or 5% for those in the lowest regular marginal tax bracket), as long as the holding period is more than one year. Under previous law, a special 18% rate (or 8% for lower income taxpayers) applied to assets held more than five years. (Note: Assuming no other changes in law, when long–term capital gain provisions of the 2003 Act will expire in 2009, the five–year holding period will apply again.)
• For individuals who made the one-time irrevocable election to treat certain property as sold and repurchased in January 2001 in order for it to later qualify for the 18% capital gain rate, no relief is provided by the 2003 Act. This is true even if they paid a 20% capital gains tax on the 2001 return as a result of this election. However, if they were to sell that property on or after May 6, 2003 (and before December 31, 2008), the capital gain on the appreciation since the effective date of the election would still be taxed at 15%.

  Even at the time of making that election, it was clear that its usefulness was limited to rare circumstances. Joe Tancer, in the aforementioned article, suggested at that time: "Ordinarily, it would not make sense for us to accelerate a gain into 2001 for a 2% tax reduction in 2006 or later. This contra-time-value-of-money arrangement makes the election impractical in most cases... After all the shuffling and prognosticating, if our government decides to lower the capital gains rate in some tax reduction bill, which is a real possibility before 2006, those who elected to accelerate income may have done so in vain." Time proved that he was right as the new lower 15% and 5% rates were enacted in 2003. One may never know what the future will bring … (In any case, you should consult your tax advisor.)

• Separate your gains and losses between long-term and short-term.
• Further divide both categories into groups reflecting sales occurred before May 6 and those on or after May 6.
• If you wind up with a total net long-term gain, and the sales on or after May 6 also net a long-term capital gain, then you qualify for the new rates.
• Otherwise, you'll use the rates in effect before the law change.