The Tax Relief Act of 1997 created two new long-term capital gain rates, 8% and 18%, for assets held for more than five years (qualifying 5 year gain property). The 18% rate applies only to property that was acquired after December 31, 2000 or for property acquired prior to that date for which a one-time Special Election was made to treat the asset as though it had been sold and reacquired in 2001. For this reason, the 18% rate would not have taken effect until 2006. This rate will now be superseded by the new 15% rate under The Jobs and Growth Tax Relief Reconciliation Act of 2003. The 8% rate did not require the asset to have been acquired after December 31, 2000. Qualifying 5 year gain property that would have been taxed at 10% under the 1997 Act is taxed at 8%.

The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the tax rate on net long-term capital gains to rates that are lower than what was provided for the 1997 Act. Gain that would have been taxed at 10% under The Tax Relief Act of 1997 will now be taxed at 5%. Gain that would have been taxed at 20% will now be taxed at 15%. The 8% rate will apply to sales of qualifying 5 year gain property that take place prior to May 6, 2003. The new rates apply to sales on or after May 6, 2003. Because of this effective date, 2003 will be a transition year. The transition rules will determine the ordering of the tax calculation.

The Form 1040, Schedule D (PDF) along with the instructions will help you calculate the correct tax during this transition year. For more information, refer to Publication 553, Highlights of 2003 Tax Changes and Publication 550 , 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.