MAXIMUM CAPITAL GAINS RATES FOR INDIVIDUALS.

SEC. 311. MAXIMUM CAPITAL GAINS RATES FOR INDIVIDUALS. (a) In General.—Subsection (h) of section 1 (relating to maximum capital gains rate) is amended to read as follows: “(h) Maximum Capital Gains Rate.— “(1) In general.—If a taxpayer has a net capital gain for any taxable year, the tax imposed by this section for such taxable year shall not exceed the sum of— “(A) a tax computed at the rates and in the same manner as if this subsection had not been enacted on the greater of— “(i) taxable income reduced by the net capital gain, or “(ii) the lesser of— “(I) the amount of taxable income taxed at a rate below 28 percent, or “(II) taxable income reduced by the adjusted net capital gain, plus 111 STAT. 832 “(B) 25 percent of the excess (if any) of— “(i) the unrecaptured section 1250 gain (or, if less, the net capital gain), over “(ii) the excess (if any) of— “(I) the sum of the amount on which tax is determined under subparagraph (A) plus the net capital gain, over “(II) taxable income, plus “(C) 28 percent of the amount of taxable income in excess of the sum of— “(i) the adjusted net capital gain, plus “(ii) the sum of the amounts on which tax is determined under subparagraphs (A) and (B), plus “(D) 10 percent of so much of the taxpayer’s adjusted net capital gain (or, if less, taxable income) as does not exceed the excess (if any) of— “(i) the amount of taxable income which would (without regard to this paragraph) be taxed at a rate below 28 percent, over “(ii) the taxable income reduced by the adjusted net capital gain, plus “(E) 20 percent of the taxpayer’s adjusted net capital gain (or, if less, taxable income) in excess of the amount on which a tax is determined under subparagraph (D). “(2) Reduced capital gain rates for qualified 5-year gain.— “(A) Reduction in 10-percent rate.—In the case of any taxable year beginning after December 31, 2000, the rate under paragraph (1)(D) shall be 8 percent with respect to so much of the amount to which the 10-percent rate would otherwise apply as does not exceed qualified 5-year gain, and 10 percent with respect to the remainder of such amount. “(B) Reduction in 20-percent rate.—The rate under paragraph (1)(E) shall be 18 percent with respect to so much of the amount to which the 20-percent rate would otherwise apply as does not exceed the lesser of— “(i) the excess of qualified 5-year gain over the amount of such gain taken into account under subparagraph (A) of this paragraph, or “(ii) the amount of qualified 5-year gain (determined by taking into account only property the holding period for which begins after December 31, 2000), and 20 percent with respect to the remainder of such amount. For purposes of determining under the preceding sentence whether the holding period of property begins after December 31, 2000, the holding period of property acquired pursuant to the exercise of an option (or other right or obligation to acquire property) shall include the period such option (or other right or obligation) was held. “(3) Net capital gain taken into account as investment income.—For purposes of this subsection, the net capital gain for any taxable year shall be reduced (but not below zero) by the amount which the taxpayer takes into account as investment income under section 163(d)(4)(B)(iii).111 STAT. 833 “(4) Adjusted net capital gain.—For purposes of this subsection, the term ‘adjusted net capital gain’ means net capital gain determined without regard to— “(A) collectibles gain, “(B) unrecaptured section 1250 gain, “(C) section 1202 gain, and “(D) mid-term gain. “(5) Collectibles gain.—For purposes of this subsection— “(A) In general.—The term ‘collectibles gain’ means gain from the sale or exchange of a collectible (as defined in section 408(m) without regard to paragraph (3) thereof) which is a capital asset held for more than 1 year but only to the extent such gain is taken into account in computing gross income. “(B) Partnerships, etc.—For purposes of subparagraph (A), any gain from the sale of an interest in a partnership, S corporation, or trust which is attributable to unrealized appreciation in the value of collectibles shall be treated as gain from the sale or exchange of a collectible. Rules similar to the rules of section 751 shall apply for purposes of the preceding sentence. “(6) Unrecaptured section 1250 gain.—For purposes of this subsection— “(A) In general.—The term ‘unrecaptured section 1250 gain’ means the amount of long-term capital gain which would be treated as ordinary income if— “(i) section 1250(b)(1) included all depreciation and the applicable percentage under section 1250(a) were 100 percent, and “(ii) in the case of gain properly taken into account after July 28, 1997, only gain from section 1250 property held for more than 18 months were taken into account. “(B) Limitation with respect to section 1231 property.—The amount of unrecaptured section 1250 gain from sales, exchanges, and conversions described in section 1231(a)(3)(A) for any taxable year shall not exceed the excess of the net section 1231 gain (as defined in section 1231(c)(3)) for such year over the amount treated as ordinary income under section 1231(c)(1) for such year. “(C) Pre-may 7, 1997, gain.—In the case of a taxable year which includes May 7, 1997, subparagraph (A) shall be applied by taking into account only the gain properly taken into account for the portion of the taxable year after May 6, 1997. “(7) Section 1202 gain.—For purposes of this subsection, the term ‘section 1202 gain’ means an amount equal to the gain excluded from gross income under section 1202(a). “(8) Mid-term gain.—For purposes of this subsection, the term ‘mid-term gain’ means the amount which would be adjusted net capital gain for the taxable year if— “(A) adjusted net capital gain were determined by taking into account only the gain or loss properly taken into account after July 28, 1997, from property held for more than 1 year but not more than 18 months, and “(B) paragraph (3) and section 1212 did not apply.111 STAT. 834 “(9) Qualified 5-year gain.—For purposes of this subsection, the term ‘qualified 5-year gain’ means the amount of long-term capital gain which would be computed for the taxable year if only gains from the sale or exchange of property held by the taxpayer for more than 5 years were taken into account. The determination under the preceding sentence shall be made without regard to collectibles gain, unrecaptured section 1250 gain (determined without regard to subparagraph (B) of paragraph (6)), section 1202 gain, or mid-term gain. “(10) Pre-effective date gain.— “(A) In general.—In the case of a taxable year which includes May 7, 1997, gains and losses properly taken into account for the portion of the taxable year before May 7, 1997, shall be taken into account in determining mid-term gain as if such gains and losses were described in paragraph (8)(A). “(B) Special rules for pass-thru entities.—In applying subparagraph (A) with respect to any pass-thru entity, the determination of when gains and loss are properly taken into account shall be made at the entity level. “(C) Pass-thru entity defined.—For purposes of subparagraph (B), the term ‘pass-thru entity’ means— “(i) a regulated investment company, “(ii) a real estate investment trust, “(iii) an S corporation, “(iv) a partnership, “(v) an estate or trust, and “(vi) a common trust fund. “(11) Treatment of pass-thru entities.—The Secretary may prescribe such regulations as are appropriate (including regulations requiring reporting) to apply this subsection in the case of sales and exchanges by pass-thru entities (as defined in paragraph (10)(C)) and of interests in such entities.”. (b) Minimum Tax.— (1) In general.—Subsection (b) of section 55 is amended by adding at the end the following new paragraph: “(3) Maximum rate of tax on net capital gain of noncorporate taxpayers.—The amount determined under the first sentence of paragraph (1)(A)(i) shall not exceed the sum of— “(A) the amount determined under such first sentence computed at the rates and in the same manner as if this paragraph had not been enacted on the taxable excess reduced by the lesser of— “(i) the net capital gain, or “(ii) the sum of— “(I) the adjusted net capital gain, plus “(II) the unrecaptured section 1250 gain, plus “(B) 25 percent of the lesser of— “(i) the unrecaptured section 1250 gain, or “(ii) the amount of taxable excess in excess of the sum of— “(I) the adjusted net capital gain, plus “(II) the amount on which a tax is determined under subparagraph (A), plus “(C) 10 percent of so much of the taxpayer’s adjusted net capital gain (or, if less, taxable excess) as does not 111 STAT. 835exceed the amount on which a tax is determined under section 1(h)(1)(D), plus “(D) 20 percent of the taxpayer’s adjusted net capital gain (or, if less, taxable excess) in excess of the amount on which tax is determined under subparagraph (C). In the case of taxable years beginning after December 31, 2000, rules similar to the rules of section 1(h)(2) shall apply for purposes of subparagraphs (C) and (D). Terms used in this paragraph which are also used in section 1(h) shall have the respective meanings given such terms by section 1(h).”. (2) Conforming amendments.— (A) Clause (ii) of section 55(b)(1)(A) is amended by striking “clause (i)” and inserting “this subsection”. (B) Paragraph (7) of section 57(a) is amended by striking “one-half” and inserting “42 percent”. (c) Other Conforming Amendments.— (1) Paragraph (1) of section 1445(e) is amended by striking “28 percent” and inserting “20 percent”. (2) The second sentence of section 7518(g)(6)(A), and the second sentence of section 607(h)(6)(A) of the Merchant Marine Act, 1936, are each amended by striking “28 percent” and inserting “20 percent”. (3) Paragraph (2) of section 904(b) is amended by adding at the end the following new subparagraph: “(C) Coordination with capital gains rates.—The Secretary may by regulations modify the application of this paragraph and paragraph (3) to the extent necessary to properly reflect any capital gain rate differential under section 1(h) or 1201(a) and the computation of net capital gain”. (d) Effective Dates.— (1) In general.—Except as provided in paragraph (2), the amendments made by this section shall apply to taxable years ending after May 6, 1997. (2) Withholding.—The amendment made by subsection (c)(1) shall apply only to amounts paid after the date of the enactment of this Act. (e) Election To Recognize Gain on Assets Held on January 1, 2001.—For purposes of the Internal Revenue Code of 1986— (1) In general.—A taxpayer other than a corporation may elect to treat— (A) any readily tradable stock (which is a capital asset) held by such taxpayer on January 1, 2001, and not sold before the next business day after such date, as having been sold on such next business day for an amount equal to its closing market price on such next business day (and as having been reacquired on such next business day for an amount equal to such closing market price), and (B) any other capital asset or property used in the trade or business (as defined in section 1231(b) of the Internal Revenue Code of 1986) held by the taxpayer on January 1, 2001, as having been sold on such date for an amount equal to its fair market value on such date (and as having been reacquired on such date for an amount equal to such fair market value). (2) Treatment of gain or loss.—111 STAT. 836 (A) Any gain resulting from an election under paragraph (1) shall be treated as received or accrued on the date the asset is treated as sold under paragraph (1) and shall be recognized notwithstanding any provision of the Internal Revenue Code of 1986. (B) Any loss resulting from an election under paragraph (1) shall not be allowed for any taxable year. (3) Election.—An election under paragraph (1) shall be made in such manner as the Secretary of the Treasury or his delegate may prescribe and shall specify the assets for which such election is made. Such an election, once made with respect to any asset, shall be irrevocable. (4) Readily tradable stock.—For purposes of this subsection, the term “readily tradable stock” means any stock which, as of January 1, 2001, is readily tradable on an established securities market or otherwise.