IRS Report Shows 38% Rise in Capital Gains Tax Collected

The rising stock market contributed to a 38% rise in capital gains tax revenue on 1997 tax returns, outstripping the rise in wages, a new IRS report said.

Although the figures are more than a year old, the Internal Revenue Service report offers the first details on how the stock market boom is affecting the personal finances of millions of U.S. taxpayers.

IRS economist Therese Cruciano, writing in the latest IRS “Statistics of Income” report, attributed the increase to the rising stock market and the 1997 tax law changes, which cut the long-term capital gains rates from 28% to a maximum of 20% on most assets.

The government received $347.9 billion in capital gains tax in the 1997 returns, according to preliminary data, up from $251.9 billion in 1996.

The report showed 19.7 million of the 122.5 million returns reporting capital gains, which generally represent profits from sale of stocks, bonds, real estate and other assets.

Behind wages and salaries, capital gains represented the second-largest segment of a taxpayer’s income. Overall, taxpayers reported adjusted gross income of nearly $5 trillion in 1997, a rise of 9.2% from the year earlier. Wages and salaries rose 7% to $3.6 trillion in 1997.

Of the $347.9 billion in capital gains in 1997, the 1.3 million wealthiest taxpayers--those with incomes greater than $200,000--reported $232.6 billion in capital gains, the IRS said.

The required holding periods have been changed back and forth in the last two years. In the first changes in the 1997 law, most investments had to be held 18 months to be eligible for the capital gains tax rate. Midyear in 1998, a one-year holding period was reinstated. (Capital gains over shorter periods are considered ordinary income.) For investors in the 15% federal tax bracket, the rate is 10%.