Taxation Of Capital Gains
Gains made on the sale of property (widely defined) are taxable as capital gains; gains made in the course of trading are more likely to be taxable as business income.

Taxation Of Capital Gains

Gains made on the sale of property (widely defined) are taxable as capital gains; gains made in the course of trading are more likely to be taxable as business income. Many types of 'trade' (meaning, often, exchange) however are classified as sales. Some types of trade are non-taxable. These are particularly thorny distinctions, and professional advice is absolutely necessary in any case of doubt.

For a trade (exchange) to be non-taxable, it must meet all six of the following (somewhat abbreviated) conditions:

• The property must be business or investment property;
• The property must not be held primarily for sale;
• The property must not be stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests;
• There must be a trade of like property;
• The property to be received must be identified in writing within 45 days after the date of transfer the property given up in the trade;
• The property to be received must be received by the earlier of the 180th day after the date on which the property given up in the trade is transferred, or the due date, including extensions, for the tax return for the year in which the transfer of the property given up occurs.

Some types of trade are partially non-taxable.

Gains and losses are taken into account for capital gains tax purposes if they relate to capital assets. Capital assets include almost everything that a person owns and uses for personal purposes, pleasure, or investment, for instance stocks and bonds, real estate, household furnishings, cars, jewellery, collections.

Non-capital assets include property held mainly for sale to customers, depreciable property used in a trade or business, real property used in a trade or business, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property created by or for its owner, and accounts or notes receivable acquired in the ordinary course of a trade or business (there are further categories).

Generally, no gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or if incident to a divorce, a former spouse. There are some exceptions to this rule. There are also special rules governing exchanges or transfers between related parties or members of a family, particularly as regards the deductibility of losses.

The gain or loss made on on a sale or trade of property is calculated by comparing the amount realized with the 'adjusted basis' of the property. Adjusted basis means the original cost of the property adjusted according to various rules. Gains are taxable; losses are deductible.

The amount realized from a sale or trade of property includes money received plus the fair market value of any property or services also received.

After the sale through a brokerage of such property as stocks, bonds, or certain commodities, the broker should supply Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or an equivalent statement, showing the gross proceeds from the sale. The IRS also gets a copy from the broker.

Redemption of stocks is treated as a sale or trade if the redemption is not essentially equivalent to a dividend, there is a substantially disproportionate redemption of stock, there is a complete redemption of all the stock of the corporation owned by the shareholder, or the redemption is a distribution in partial liquidation of a corporation. Redemption or retirement of bonds or notes at their maturity is generally treated as a sale or trade.

Stocks, stock rights, and bonds (other than those held for sale by a securities dealer) that became worthless during the tax year are treated as though they were sold on the last day of the tax year.

Distributions of capital gains (sometimes misleadingly called capital gain dividends) are paid out by regulated investment companies, mutual funds and real estate investment trusts (REITs). They are shown in box 2a of Form 1099-DIV provided by the payer.

Capital gain distributions count as long-term capital gains regardless of how long they have been owned.

Undistributed capital gains are reported by mutual funds and REITs on Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains. These also count as long-term capital gains.

A US citizen who sells property located outside the United States must report all gains and losses from the sale of that property unless it is exempt under US law.

Capital gains and losses are classified as long–term or short–term. If an asset is held for more than one year before disposal, the capital gain or loss is long term. If it is held for one year or less, the capital gain or loss is short term. For inherited investment property, any capital gain or loss on any later disposition of that property is treated as a long-term capital gain or loss.

Capital gains and losses are normally reported on Form 1040, Schedule D. Losses can usually be set off against gains in the same category. The term "net capital gain" means the amount by which net long–term capital gain for a year is more than net short–term capital loss. The highest tax rate on a net capital gain is generally 15% (or 5%, if it would otherwise be taxed at 15% or less). There are 3 exceptions:

• The taxable part of a gain from qualified small business stock is taxed at a maximum 28% rate (at the time of writing).
• Net capital gain from selling collectibles such as coins or art is taxed at a maximum 28% rate.
• The part of any net capital gain from selling Section 1250 real property that is due to recapture of straight-line depreciation is taxed at a maximum 25% rate.

A tax-payer with a taxable capital gain may be required to make estimated tax payments.

If capital losses exceed capital gains, the amount of the excess loss that can be claimed against regular income is limited to $3,000, or $1,500 for a person who is 'married filing separately'. Excess losses can be carried forward to future years.

Gains from the sale of publicly traded securities may be subject to 'rollover' if during the 60-day period beginning on the date of the sale, replacement property is bought. This replacement property must be either common stock or a partnership interest in a specialized small business investment company (SSBIC). There are limits on the amount of gain that can be rolled-over.

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Taxation Of Capital Gains
Gains made on the sale of property (widely defined) are taxable as capital gains; gains made in the course of trading are more likely to be taxable as business income.