! quired holding period, the transaction

CAUTION is not subject to section 1231 treat-

ment, and any gain or loss is ordinary income reported in Part II of Form 4797. See Table 9-1.

Treatment as ordinary or capital. To determine the treatment of section 1231 gains and losses, combine all of your section 1231 gains and losses for the year.

• If you have a net section 1231 loss, it is an ordinary loss.

• If you have a net section 1231 gain, it is ordinary income up to your nonrecaptured section 1231 losses from previous years, explained next. The rest, if any, is long-term capital gain.

Nonrecaptured section 1231 losses. Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain. Therefore, if in any of your 5 preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses. These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period.

Example. In 2025, you have a $20,000 net section 1231 gain. To figure how much you have to report as ordinary income and long-term capital gain, you must first determine your section 1231 gains and losses from the previous 5-year period. From 2020 through 2024, you had the following section 1231 gains and losses.

Year Amount 2020 -02021 -02022 ($25,000) 2023 -02024 $18,000

You used this information to figure how to report your net section 1231 gain for 2025 as shown below.

1. Net section 1231 gain (2025) . . . . . $20,000

2. Net section 1231 loss (2022) . . . . . . . . . . . . . . ($25,000)

3. Net section 1231 gain (2024) . . . . . . . . . . . . . . $18,000

4. Remaining net section 1231 loss from prior 5 years . . . . . . . . . ($7,000)

5. Gain treated as ordinary income . . . . . . . . . . . . . . . $7,000

6. Gain treated as long-term capital gain . . . . . . . . . . . . . . ^$13,000

Your remaining net section 1231 loss from 2022 is completely recaptured in 2025.

Property held for sale to customers. A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers.

Property deducted under the de minimis safe harbor for tangible property. If you deducted the cost of a property under the de minimis safe harbor for tangible property (currently $2,500 or less, or $5,000 or less, if you have an applicable financial statement), then upon its sale or disposition, this property is not treated as a capital asset or as property used in the trade or business under section 1231. Generally, any gain on the disposition of this property is treated as ordinary income reported on Part II of Form 4797.