Gains qualify for deferral when they meet the definition of short-term or long-term capital gain as currently defined in the tax code. Gains deferred are specifically identified. If you defer a short-term capital gain, in 2026 your tax liability will be determined based on the applicable short-term gain tax rate in effect at that date. The same would apply to long-term capital gains.
It makes no difference whether the gain is short-term or long-term capital gain. It qualifies either way for the deferral benefits.
You will report the gains on form 8949 as usual and make the election to defer as described in the instructions.
That has to do with the holding period for the asset, but I'm neither an accountant nor a lawyer, and they would be able to provide helpful details.
The need to report the capital gain is deferred until 2026, at which time the gain is reported at the original amount and classification.
The gain deferral under the Opportunity Zone applies to all capital gain, whether short term or long term. The key is to be wary of such nuances as Sec. 1231 gains that have special netting and timing rules and also that depreciation recapture does not qualify for deferral. The properly application and interpretation of this code section against the relevant facts should be closely scrutinized with your qualified tax preparer.
It doesn’t matter as long as it is capital.
Short term is generally a year or less. Long term is more than one year.
Gain is long term if the asset was held more than one year. “Held” has technical legal meaning. Otherwise, short term.
The taxpayer can elect to apply the deferral to a short-term gain before applying to a long-term gain. Each transaction stands on its own. The election is made independently for each capital gain. The gain proceeds must be invested within 180 days of the sale. The additional implication is that capital losses do not need to offset capital gains. There are other complications such as gain from depreciation recapture. Each situation should be reviewed knowing all facts and circumstances of the taxpayer.
The capital gain deferred through the QOZ program will maintain its character upon recognition, regardless of how much time has passed or what other events have occurred. So if the taxpayer deferred short-term capital gain, it will be short-term upon recognition, regardless of whether more than a year has passed since making the QOZ investment.
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