Understanding Capital Gains and Losses

What is a Capital Asset?

The IRS considers capital assets to encompass almost all of the property you own for personal use or as an investment. This includes stocks, securities, houses, cars, and jewelry. However, under the tax code, Section 1221, capital assets exclude the following property:

  1. Stock or property in a taxpayer’s trade that is held as part of their ordinary course of business.
  2. Business property that a taxpayer is permitted to depreciate.
  3. A copyright or some form of artistic composition if created by the taxpayer, or a letter or memorandum prepared for the taxpayer.
  4. Accounts receivable that are part of the taxpayer’s ordinary course of business.
  5. A U.S. Government publication held by a taxpayer who received it.
  6. A “commodities derivative financial instrument” held by a dealer of such an instrument.
  7. A hedge transaction clearly identified as such in a timely manner.
  8. Supplies used or consumed by the taxpayer in the ordinary course off their business.

Why is this definition important? Because it directs you, as a taxpayer, to identify what capital gains and losses you must report on Form 8949 when you sell a capital asset. Significantly, if you look at the exclusion list above, you will notice that business or trade assets are largely excluded from capital gains and losses because for IRS purposes, they are already accounted for in other ways.

How Is a Capital Gain or Loss Calculated?

There are numerous methods of calculating a capital asset’s cost, referred to as its “basis”. But simply stated, capital gains or losses are essentially calculated by taking the sales price of a capital asset and subtracting its basis. If you sell a capital asset for more than you paid, then you have achieved a capital gain. If you sell a capital asset for less than what you paid, then you have achieved a capital loss. Further, the sale of a capital asset is classified as either “short-term” or “long-term”. Short-Term assets refer to property you have held for a year or less. Long-term capital assets are properties that you have held for greater than a year prior to sale.

Why is this significant? Because of a significant difference in tax rates. Short-term capital gains are taxed up to the same rate as your annual income; while long-term capital gains are taxed at a much lower tax rate, depending on your tax bracket.

Contact an Experienced Attorney for Assistance

The classification of short term and long term capital gains and losses can have an enormous influence on your tax return and on the decisions you make for your business. If the IRS has rejected or adjusted your tax return, contact the Law Offices of Robert S. Thomas for your tax appeal options. I have a Master of Law Degree (LLM) in Taxation and am licensed to practice in the United States Tax Court. With over twenty years of experience in IRS taxation, I understand that the IRS doe not always get things right. Let me stand up for your legal rights. Contact The Law Offices of Robert S. Thomas at 847-392-5893 to schedule a consultation or visit our website today.

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