At a high level, there are three main steps than adding process. First, after we calculate the recognized gains or losses on her property transactions which we know how to do from all our previous videos. We need to classify those gains and losses into the proper category based on the type of asset we just sold. So is the gain or loss an ordinary gain or loss because we sold in an ordinary asset? Do we have a short-term capital item or a 28 percent long-term capital item or a 25 percent capital item or a long-term capital item that is subject to the zero, 15 or 20 percent preferential tax rates? For example, stocks or bonds. Later on another category, we'll discuss will be for section 1231 assets. So again, in the first step, we classify all our gains and losses into the right category. In our second step after we've put all those gains and losses in the right category, we can go ahead and net all those items within each category. So for example, if we have three short-term capital gain items and two short-term capital loss items, then we can net all of them together because they're all short-term capital items to come up with one net number for that category. Let's say I sold some antiques like sold some wine and sold some stamps, both of which are collectibles. I can combine those items into one net number because they're all within the 28 percent long-term capital category. So we do this netting of any gains and losses within each category as our second step. After we've done that, we're left with at most one number in each category which represents the net gain or loss for that category. So maybe we have a net short-term capital gain or loss and or a net collectibles long-term capital gain or loss and or a net-zero, 15, 20 percent long-term capital gain or loss. So one net number per category. What I can do then in our third step is net the numbers across categories according to the netting procedure. This can get complicated. So I'll walk you through it in a few minutes. But first, a side issue here is what do we do about dividends. Recall the qualified dividends or dividends paid from domestic and certain foreign corporations are eligible for the zero, 15, 20 percent preferential tax rate. However, this treatment is technically separate from the netting procedure. It's not a category that we'll worry about. Now, if there happens to be a net long-term capital gain, we can add the dividends to that net long-term capital gain to determine the total income subject to the zero, 15 or 20 percent tax rates. But if there's a net short-term or long-term capital loss, we do not combine the dividends with those losses. We would only be able to deduct the net capital loss up to $3000 per year and carry forward the rest. While the dividends will still be taxed at the zero, 15 or 20 percent rate. The point here is that although these qualified dividends are technically taxed at the same preferential tax rates as long-term capital gains, we're not actually using them in the netting process. Importantly, we're not able to net them with short or long-term capital losses. So let's take a look at this netting map. Although it's an abbreviated version that focuses on this video's main points. Here we show five categories short-term capital gains and losses. The 28 percent long-term capital gains or losses related to collectibles. The 25 percent long-term capital gains related to unrecaptured Section 1250 gains. These are only gains, not losses. The zero, 15, 20 percent long-term capital gains and losses related to, for example, sales of stock or other personal or income-producing property. Finally, ordinary income and losses. So why do we have these five columns? Well, recalling or ordering procedure, we first need to classify our gains and losses into the right category. That is when we sell property is the gain or loss that we recognize short-term capital or long-term capital or ordinary. We would first place that gain or loss in the correct column. Next recall that the second step is to net the gains and losses within each column or category. So that we're only left with at most one net number in each column. Once that's done, then for the third step, this netting map will kick in. That's when these directions are useful. The key with this netting map is that when we net short-term with long-term capital gains and losses, we must move from left to right across the columns in this map. That is we start with short-term capital gains and losses, then move left to right across each of the long-term columns. To the extent we have opposing signs and connect them or offset gains in one column with losses in another column. So let's start with the idea that we have gains in every column, in every category. Well, as we net across columns in our third step of the ordering procedure, we first have to start with net short-term capital gains. If we have net short-term capital gains in the first column, it'll be taxed as ordinary income. If all the other columns are also gains, then those long-term capital gains will each be taxed at 28 percent 25 percent or zero, 15 or 20 percent depending on the kind of long-term capital gain we have in each column. So at the end of the day, we'll move the net short-term capital gain item out of the first column and stick it into the last column, into the ordinary income column and bypass the long-term columns, again, assuming they're all gains. Now, what if the short-term capital column reports a net gain but there's a net loss in one of the long-term columns? Well if that happens we need to net the short-term capital gain with the long-term capital loss. But before we do that, we need to figure out what are various long-term capital gain columns are doing. Namely, are they all also of the same sign or are some of these long-term capital columns, are the gains while others are losses? If so, we need to net them. So if you see in the middle of this chart we have opposing signs in the 28 percent and the 25 percent columns. Say collectible loss in the 28 percent column and an unrecaptured Section 1250 gain in the 25 percent column. So if this happens, we need to offset them. If the result is of opposite sign of the zero, 15, 20 percent long-term column, we need to offset this net 28 percent 25 percent number with the zero, 15, 20 percent number. If say the 28 percent column is again and the zero, 15, 20 percent comm reports loss. We first offset that loss against the 28 percent gain. Then the 25 percent gain if any. So at the end of the day, we can Net within the long-term capital columns to the extent they are of opposite signs. If however we're left with net long-term capital gains in these columns, we very well might have gains taxed here at 28 percent at 25 percent and or at zero, 15 or 20 percent. But if after netting the Three long-term capital gains comes we're left with a long-term capital loss, it is simply a long-term capital loss. If the long-term capital loss items are greater than any net short-term capital gains, we would net them. If we're left with a long-term capital loss, then this loss is eligible for only a $3000 capital loss deduction, which is actually ordinary for AGI deduction and the rest is carried forward. If however, the long-term capital loss item is smaller than the net short-term capital gain item, then we have a net short-term capital gain. Then that net short-term capital gain item will be taxed at ordinary rates. Finally, in our last column of ordinary income or losses, recall that in this column goes any net short-term capital gains. As well as items that we'll discuss later such as Section 1245 and Section 1250 recaptured gains.