Capital Gains
| Author | Jeffrey Wilson |
| Pages | 1281-1284 |
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The United States Tax Code is a complicated document. The power to levy taxes on the U.S. population belongs to Congress, and the authority to collect those taxes rests with the Executive branch. The Internal Revenue Service is the agency within the executive branch of the federal government that collects the taxes. But states also have the power to levy taxes on their own populations in addition to whatever the federal government does. One part of an individual's or corporate entity's financial profile which is subject to taxation is capital gains. To de termine taxation of capital gains, one must also consider capital losses. Gains are taxable, and losses may help offset tax liability.
When individuals sell or dispose of property and realize an amount over the adjusted basis of that property they have gain. When they sell or dispose of property and realize an amount below the adjusted basis of the property they have loss.
Capital gains are gains from the sale or exchange of capital assets. Capital losses are losses or reductions in value resulting from the sale or exchange of capital assets. To more fully understand the concepts of capital gains or losses, individuals need to understand the concepts of capital assets and basis. Once they understand these two concepts, then they can begin to see how they function within the broader context of the tax rules for capital gains and losses.
Almost everything individuals own and use for personal purposes or investment qualifies as capital assets. Homes, household furnishings, store equipment, computers, stocks and bonds are all capital assets. When a person sells a capital asset, the difference between the sale price and the basis in the property, which is usually its previous cost, is either a capital gain or a capital loss. A capital gain occurs when property sells for more than the basis. A capital loss occurs if the asset sells for less than the basis. Losses from the sale of property that was acquired for personal use such as a home or a vehicle are not deductible as capital losses.
Capital assets are any property held by a taxpayer except property that falls in one of the following categories:
used in business and is depreciable
stock in trade or inventory
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held primarily for sale to customers in the ordinary course of taxpayer's trade or business
certain copyrights, compositions, letters, and memorabilia
Basically, most assets not used in business are capital assets. Assets used in a business are capital assets unless they may be depreciated or are inventory items.
Whether an asset is held primarily for sale is a question subject of much litigation. If an owner is unsure of the status of an asset, he should consult his attorney or tax advisor. People need to remember that transactions involving stocks and bonds by someone who is not a dealer or an underwriter will always result in capital gain or loss, regardless of the frequency of sales. This rule affects so-called "day traders," many of whom may not be aware of the tax laws as applied to their small-scale trading.
The basis of a capital asset is usually equal to the cost of the asset. Two exceptions to this general rule have to do with how the asset was acquired:
Inheritance:—the basis will be equal to the estate tax value in the decedent's estate. This amount is usually calculated on the value of the property on the date of death.
Gift:—the basis is the same as it would have been for the person who gave you the gift (the donor) or its fair market value, whichever is...
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