US Tax series -3
Capital Gains and Losses
-Definitions and Basics.
-Classification of Gains /Losses.
-Treatment of Losses.
-Schedule D
Capital Assets
Capital assets are properties specified in the tax law that give rise to capital gain or loss.
All property is considered a capital asset, except:
•Property held for resale (inventory)
•Real or depreciable property used in a trade or business (i.e., operational or fixed assets) (see IRC §§1231, 1245, and 1250)
•Accounts or notes receivable acquired in normal course of business
•Copyrighted or a literary, artistic, or musical composition in the hands of the creator or anyone who assumes the creator's basis (i.e., the property was received as a gift)
•U.S. government publications received from the government at a reduced price
•Almost everything you own and use for personal purposes or investment is a capital asset.
•U.S. government publications received from the government at a reduced price
•Almost everything you own and use for personal purposes or investment is a capital asset.
Holding Period:
length of time an asset has been owned (held).
In general, Assets owned longer than one year have been held long term. Assets owned one year or less have been held short term.
In general, Assets owned longer than one year have been held long term. Assets owned one year or less have been held short term.
Cost Basis:
The basis of property is usually its cost. The cost is the amount paid in cash, debt obligations, other property, or services. It includes:
• Sales tax.
• Freight.
• Installation and testing.
• Excise taxes.
• Legal and accounting fees (when they must be capitalized).
• Revenue stamps.
• Recording fees.
• Real estate taxes (if assumed for the seller).
Adjusted Basis:
Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, certain adjustments (increases and decreases) are made to the basis of the property. The result of these adjustments to the basis is the adjusted basis.
Fair market value (FMV): is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, who both have reasonable knowledge of all the necessary facts.
Sales of similar property on or about the same date may be helpful in figuring the FMV of the property.
Short-term capital gain is taxed at the same rates as ordinary income, regardless of the seller's tax bracket.
Long Term Capital Gain is taxed at 20%.(Reduced to 15% rate this year for assets sold after May 05, 2003)
