after be deducted from ordinary or current income if the result was to reduce the normal and surtax otherwise payable by more than 1212 per cent. The rule laid down in the Revenue Act of 1924 was carried over into the Revenue Act of 1926. Discussion of the provision.-The rule relating to capital gains and losses may be stated as follows: If the taxpayer holds certain property for more than two years it becomes a capital asset and he may elect to treat the gain on sale thereof either as subject to normal and surtax or as subject only to a tax of 122 per cent. It follows that he will choose that course which results in the lowest amount of tax. If in the same year he sells some of such capital assets at a profit and some at a loss he must offset one against the other and arrive at a net capital gain or a net capital loss. If the result is a net capital gain he may treat it as above stated; if it is a net capital loss he must do one of two things. He has no right to choose which of the two things he may do it must be that thing which results in the larger tax. One of the things he must do is to deduct the capital net loss from his ordinary income and pay normal and surtax on the remainder; the other is to deduct 1212 per cent of the net loss from the amount of tax otherwise due from him. In other words, if the taxpayer has a capital gain he may elect to report it in the way which will produce the lesser amount of tax; if he has a net loss he must report it in the manner which will have the lesser effect on the reduction of his tax. This rule has the merit of placing capital gains and capital losses as nearly as possible on a parity so far as their effect on the tax of the seller of the property is concerned. In no case is the capital gain taxed at more than 122 per cent, and in no case does the capital loss reduce the tax by more than 1212 per cent. It has been suggested that the taxpayer should have the option to treat the capital loss as he pleases. Such right on the part of the taxpayer would result in a capital net loss always reducing the tax otherwise payable by 122 per cent and, in cases of larger incomes, by as much as 25 per cent. There appears to be little in this suggestion to commend it. It has also been pointed out that the taxpayer may legitimately obtain the benefit of a deduction of more than 1212 per cent of the loss on sale of property by selling immediately before the expiration of the two-year period, in which event the loss must be allowed as a deduction from net income, subject to normal and surtax. On the other hand, it has been pointed out, the same taxpayer may postpone selling his property until two years have elapsed in order to obtain the benefit of the lower rate of 1212 per cent in place of the combined normal and surtax rates. There appears to be no data to indicate that any substantial amount of revenue is lost by reason of the alleged practices above stated. Even assuming the practices are followed to some extent, no method of correcting them presents itself. It is obvious that taxpayers can not be forced to take profits or refrain from taking profits in order to increase the revenue. In fact, it was partly from recognition of this fact that Congress was impelled to extend a lower rate of tax in order to induce the taking of profits on transactions which might otherwise be postponed indefinitely. Taxpayers who realize capital gains fall into two classes-(1) those who sell property not primarily purchased for purpose of resale, and (2) those who sell property purchased for the purpose of resale. In the former group fall a large number of persons who sell residences, factories, land, and investments often held for a period of many years. In the latter group fall those who buy stocks, bonds, and other property in the expectation of selling on a rising market. From the viewpoint of the first group the capital-gains tax must be regarded as a very needful remedial provision. Their sales are often made under some degree of compulsion, such as the necessity of moving to a new neighborhood, retirement from business, settlement of interests of cotenants, etc. Where property has been held for 10 or 15 years and is then sold, the result may be the immediate conversion into cash of a relatively large profit accumulated over a long period of time. To tax that profit at graduated surtax rates, designed primarily to measure the tax on a single year's profit, is obviously unduly burdensome. If it were practicable to segregate such transactions, consideration might properly be given to their special treatment. The second group might be divided into two subgroups-(a) those individuals who make occasional purchases of stocks or other property in expectation of increasing their capital, and (b) those who with more or less regularity buy and sell property for the purpose of making a profit; this group includes the stock-market trader, the real-estate operator, and the speculator, as well as many persons of moderate wealth or great wealth. In considering the second group of taxpayers it should be noted that the "quick profit " made by a lucky venture where the purchase and sale take place within two years is taxed at the full normal and surtax rates. It is only where more than two years have elapsed that the lower rate of tax applies. That lower rate of tax is proper in many cases is obvious; the lapse of time necessary before the profit is realized is the justification. On the other hand, if the taxpayer is in any event subject to a surtax in the highest bracket, year after year, the capital-gains tax is an obvious concession to him, irrespective of his ability to pay. With respect to taxpayers of this class the capital-gains tax must obviously be regarded as an expedient provision, justifiable on the ground that it induces them to sell property which they are well able to hold for an indefinite period of time, perhaps finally to descend by bequest, devise, or inheritance without any tax having been imposed upon the increased value of the property. Such taxpayers are able to adjust their affairs to a great extent so that losses can be taken at favorable times and profitable sales postponed for long periods. As evidence of this the statistics of the Senate committee known as the Couzens committee are illuminating. The following table was compiled by that committee from the returns of 4,063 individuals who returned a net income in excess of $100,000 each for the year 1916. The figures show the gains and losses from sales of property as reported for the years 1917 to 1924, both inclusive. Profits and losses on sale of assets reported by 4,063 individuals with a net taxable income of $100,000 and over in 1916 The following table is prepared from the returns of 75 individuals who reported a net income in excess of $1,000,000 each for the year 1924. The table covers the years 1917 to 1925, both inclusive: The first table shows that from 1917 to 1920, both inclusive, 4,063 individuals reported gains in the aggregate amount of $84,772,805 and losses aggregating $424,593,321, the net result being approximately $340,000,000 more of losses than gains. In the same period of time the 75 individuals of great wealth reported $8,694,744 in gains. and $119,361,285 in losses. These were years of high values and great activity in the sale of property, yet in each year the losses were greatly in excess of the reported gains. Undoubtedly the very high surtax rates forbade the taking of profits and encouraged the taking of losses. Beginning in the year 1922 a large increase in reported profits is discernible, which amounts in both tables to a substantial excess over losses in 1924, the first year in which the present method of taxing capital gains and treating capital losses went into effect. While some allowance must be made for the great prosperity, enjoyed in 1924 and 1925, the statistics support the conclusion that the capital gains tax has removed the restraint exercised by the surtax rate on profit-taking. The same trend in the relation of gains to losses is indicated in the following table prepared for this committee covering the returns of all individual taxpayers. Statistics of losses are not available and the losses stated below are estimated from selected actual figures: 60481-27-VOL I- 4 Actual profits and estimated losses on sale of assets regardless of time for which such assets were held It is pointed out that in all three tables set forth in the preceding pages the ratio of gains to total income shows a marked increase in each case beginning with the year 1922, coinciding with the introduction of the capital gains rate of tax. Although the full effect of this rise may not be attributable entirely to the reduction of the rate, it is significant that the remarkable activity of the stock markets did not take place until some time later. A fair inference may be drawn that the lowering of the rate largely contributed to bring activity in the sale of property. The actual receipts from the capital gains tax attest to the importance of that tax in the revenue of the Government. The following table gives the figures for 1924 and 1925. For comparison the estimated receipts from the tax due to gains on property held for less than two years is included in this table: 1924 Actual net revenue from 121⁄2 per cent tax on capital net gains, less 122 per cent credit on capital net losses___. $39, 567, 328 Estimated net revenue from tax on profits from sale of assets held less than two years, minus tax reduction on losses on such sales. 20, 996, 000 Total, 1924 60, 563, 328 1925 109, 912, 033 Actual net revenue from 121⁄2 per cent tax on capital net gains, less 122 per cent credit on capital net losses___ Estimated net revenue from tax on profits from sale of assets held less than two years, minus tax-reduction losses on such sales_ 69, 892, 000 Total, 1925 179, 804, 033 240, 367, 361 Grand total net revenue, 1924 and 1925_The following table has been prepared for the committee to indicate the relative amount of capital net gains and capital net losses reported by taxpayers having incomes within specified ranges: Table I of the appendix to this volume sets forth further figures illustrating the incidence of the capital-gains tax and its effect upon the revenue. No conclusions have been formulated based upon these figures. Several suggestions have been made and are taken under con-sideration with a view to further study of the problem. The problem of taxing capital gains and losses may find its ultimate solution in an elongation of the two-year period in which the property must be held. Four years has been suggested as a means of increasing the revenue from this source. But a four-year period may exercise a considerable restraint upon sales. Two transactions may now take place in approximately four years if the final profit after paying the 122 per cent tax warrants it, while only one might be consummated if a four-year period were prescribed. The loss in revenue from the failure to make two sales might offset any other advantage. Dividing the capital gain by the number of years during which the property was held and adding one part to the other income of the taxpayers for each of such years might bring about theoretical perfection but would raise insuperable administrative complications. Varying the rate in proportion to the maximum rate of surtax to which the taxpayer is subject on his ordinary net income seems impracticable. Therefore, notwithstanding that the present method of using a single rate results in no reduction below normal and surtax in the case of taxpayers reporting $30,000 or less of net income and gives a constantly increasing reduction as the ordinary net income increases above $30,000, its continuance is recommended as a practical, simple, and effective method of raising revenue until some other means not yet discovered appears with superior advantages. It is suggested that the simplest method is to include capital gains in ordinary net income subject to normal and surtax, but that a return to this method should not be considered at this time. When the next substantial decrease is made in the combined rates of normal and surtax, consideration might be given to a return to the rule that |