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The 40 percent exclusion is available only with respect to assets "held by the taxpayer for mo.re. than three years" prior to the sale giving rise to adjusted net capital gain. If the seller is a pass-through entity, such as an S-Corporatlon, partnership or limited liability company, the exclusion is available to the shareholder, partner or member who reported adjusted net capital gain with respect to the sale provided the entity held the asset for more than three years. Reg. §1.5811(21)(B)(ii)- 8 Basis The 40 percent exclusion applies only to gain that is included in "adjusted net capital gain" (see subdivision 2 above) which is an amount determined under federal law. Any basis adjustment permitted under federal law to arrive at adjusted net capital gain is therefore reflected in the amount which is eligible for the Vermont exclusion. For example, to the extent that expenses associated with one asset are capitalized to another asset under federal law, that reallocation is recognized for purposes of determining the adjusted net capital gain eligible f9r the 40 percent exclusion.

Reg. §1.5811(21)(B)(ii)-9 Holding Period When stock or another form of ownership interest in a business is sold, the three-year holding period is measured from acquisition of the stock.pr interest. In the case of an asset sale, the Department will follow federal rules in determining holding period of the asset the sale of which gives rise to adjusted net capital gain. Reg. §1.5811(21)(B)(ii)-10 Filing Requirements In ord,er to exclude capital g~ins income from Vermont income tax, taxpayers will need to identify income that qualifies as adjusted net capitc;il gain income under Section l(h) of the Internal Revenue Code. Vermont taxable income may be reduced by the first $5000 of such income. Alternatively, taxpayers with eligible assets held more than 3 years may claim the 40 percent exclusion in lieu of the flat exclusion. All taxpayers claiming the 40 percent exclusion should retain records detailing the source of the gain that can ·be produced upon request by the Department. If there is a loss with respect to the sale of an asset that would qualify for the 40 percent exclusion if the transaction had resulted in a gain, the loss must be netted against gains that qualify for the 40 percent exclusion. "Adjusted net capital gain" for purposes of calculating the exclusion u,nder ·32 V.S.A. § 5811(21)(B)(ii) may not exceed ~he amount of capital gain reported on line 13 of Federal Form 1040. 6