The Tax Relief Act of 1997 created two new long-term capital gain rates, 8% and 18%, for assets that have been held for more than five years.

Beginning in 2001, the 8% rate applies to long-term capital gains otherwise eligible for the 10% capital gain rate, if the property was held more than five years. The 10% rate generally applies to gain that would have been taxed below 20% if it were not capital gain. The instructions to Schedule D for 2002 will help you figure the amounts taxed at 8%.

The 18% rate will apply to long–term capital gains otherwise eligible for the normal 20% capital gain rate, if the holding period is more than five years. However, the property must have been acquired after December 31, 2000, so the 18% rate will not apply until 2006.

If you acquired an asset before 2001, it may still qualify for the 18% rate if you made a one-time Special Election to treat the asset as though you had sold and reacquired it in 2001. Although you paid tax on any gain from this "deemed sale" in 2001, the asset has a new holding period and any future gain will be eligible for the 18% rate in 2006.

For more information, refer to Publication 553 (PDF), Highlights of 2001 Tax Changes (Some of the changes for 2002 are included). When it becomes available, the 2002 edition of Publication 550 (PDF), Investment Income and Expenses, will provide additional information. You may also refer to the "Frequently Asked Questions", and/or the "Tax Trails" on the IRS web site.

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