There's a difference between capital gains and capital gain distributions. Capital gain distributions are a type of dividends, typically from mutual funds. They are reported in box 2a of Form 1099-DIV. Capital gain distributions can be reported on the parent's tax return.
When an investment in a UTMA is sold, the resulting gain or loss is a capital gain or loss. The sale is reported on Form 1099-B. Capital gains and losses from investment sales cannot be reported on the parent's tax return.
But as I said earlier, the only advantage of reporting the children's income on your return is that it's a little less paperwork. But there are potentially significant disadvantages that can result in higher tax for both you and the children. Part of their income gets included in your Adjusted Gross Income (AGI). This could cause you to lose certain deductions or credits that are limited or phased out based on AGI. It could also increase your state tax. The children lose the ability to take certain deductions that they could take on their own returns, and they lose the 0% tax rate on part of their qualified dividends and capital gain distributions. So you are probably better off, and certainly no worse off, having the children file their own returns.
If the children have capital gains from the sale of investments in the UTMA you have no choice. Capital gains, as opposed to capital gain distributions, cannot be reported on the parent's tax return.
