These gains don't cause pain. A capital gain is the amount of money you pocket by selling one of your investments for more than you paid for it. Technically, capital gains only count for what's called a capital asset, but that's really just anything you own for investment purposes. Stocks and bonds obviously qualify, but your house and household furnishings can also count.

For tax purposes, capital gains are classified as either long-term (held for more than one year) or short-term (held for less than one year) and there are different tax implications for how long you hold onto a capital asset. For most long-term capital gains, you're taxed no more than 15% of the value of the asset. Short-term gains get taxed as regular income, so you pay the rate for the tax bracket you're in.

Capital gains can also be realized or unrealized. When you physically sell an asset like a stock, you've realized the capital gain. When you're holding the stock, and it has a value over its purchase price, but you're not selling it, you've got an unrealized gain, and you won't realize it until you sell.

In a perfect world, we'd all have capital gains. But no one¿s that smart or lucky. When the value of an asset at sale is below what you've paid for it, it's called a capital loss. The good news is that the government lets you count that loss against any gains you've had, lowering the taxes you pay. In fact, many people who sell a stock that has risen far over their purchase price tend to sell some stinkers, too, at the same time for the tax benefit. This is known as a capital-loss offset.

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Wednesday, August 20, 2008

Analysis

Government Officials Meeting with Freddie, Fannie

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Ken Sweet

FOXBusiness

Treasury officials and other government regulators are meeting with Fannie Mae and Freddie Mac executives this week to review the implications of a possible rescue of the struggling mortgage giants, sources told The Wall Street Journal and FOX Business on Wednesday.

FOX Business reported Wednesday that James Lockhart, the director of the Federal Housing Finance Agency, has returned early from a two-week vacation to deal with swirling rumors related to Fannie (FNM) and Freddie (FRE) and to meet with Treasury officials.

The FHFA is a government agency created in July that includes among other agencies the Office of Federal Housing Enterprise Oversight, the chief regulator of Fannie Mae and Freddie Mac.

The new developments are in addition to the report that Treasury officials have met with Freddie and Fannie officials to discuss what possible structure a government intervention might take if it becomes necessary, according to The Wall Street Journal.

In July, Congress authorized Treasury officials to take an equity stake in the government-sponsored enterprises or loan them a potentially unlimited sum of money to rescue them from a financial collapse.

The publicly held mortgage companies have seen their shares plunge this week as rumors fly around trading floors that the Treasury might actually have to use that authorization.

Both companies have issued statements this week to assure investors not to worry. It hasn't helped.

Fannie Mae Chief Executive Daniel Mudd said on National Public Radio that "Fannie Mae has more capital than it has ever had in its history" and it has not been offered help by U.S. Treasury officials.

What a bailout for the two mortgage giants will look like is unclear at the moment. According to Barron's, who issued a report this weekend for Fannie and Freddie, a possible structure would consist of the government purchasing massive quantities of preferred stock in both companies.

Preferred stocks are convertible investments that are often first in line to get paid off if a company goes bankrupt. Quincy Krosby, chief investment strategist at The Hartford, said the government would likely use convertible stock because it has the highest chance of providing the necessary liquidity to Fannie and Freddie, while also providing the best chance of taxpayers getting their money back or even turning a profit.

While that would provide a guarantee to a taxpayer, it would essentially ruin the value of the common stock, securities experts said. That’s why the current shares of Fannie and Freddie have lost nearly 80% of their value this year.

“Common shareholders are usually the last in the line behind preferred shareholders,” said Charles Whitehead, a securities law professor from Boston University.

Vicki Tillman, a credit analyst with Standard & Poor’s who watches the two mortgage companies, believes the market has overreacted to the problems at Fannie and Freddie.

“We have stressed the possible losses to their furthest extents and they still are above the adequate capital levels needed,” Tillman said. “People have taken the government plan announced last week and have begun to read into it. It is what it is. It’s just market speculation.”

S&P currently rates the two companies at a “A-“ rating. They were downgraded last month when the government issued their plan.