Posted by Dennis Jao

What is Capital Gains and Losses from the Sale of Assets?

What is Capital Gains and Losses from the Sale of Assets?

There are two ways a business can make or lose money. You can profit from your sales activities or lose money by spending more than what you earn from sales. You can also earn or lose money through your investments or the sale of assets held by the business.

Each of these types of losses or gains is taxed differently. The income is taxed as ordinary income and at the normal rate of corporate or personal income tax. Gains or losses on investments or sales of assets are taxed as capital gains or losses but may depend on the type of asset.


Capital Gains and Losses

Capital gains or losses are capital gains or losses that a business or individual experiences in an asset's sale. If an asset's selling price is greater than the owner's basis on that asset, the result is a capital gain. If the selling price is lower than the basis, it results in a loss of capital. The basis is typically the purchase price of the asset plus any capital improvements and selling costs.

Capital gains and losses also occur when a business writes off an asset and removes it from the balance sheet. This may be the case with accounts receivable when debts are owed to the business but are unlikely ever to get paid for one reason. 

Nearly everything a business owns and uses is capital property. When a capital good is sold at a profit, there is a capital gain. A loss of equity occurs when a stock asset is sold at a loss. An example of a loss of capital for a business would be one that buys a building for $ 250,000 and sells it two years later for $ 200,000. The difference of $ 50,000 will be considered a long-term capital gain.


Long Term vs. Short Term

Capital gains and losses come in two forms: long term and short term. Short-term losses or gains are those on assets held for one year or less before being sold. Long-term capital losses and gains resulting from the sale of assets held or held for more than one year before the sale.

Long-term income is subject to 0, 15, or 20% tax rates for individuals and investors. The rate depends on the person's overall income - the higher the income, the higher it is. Short-term income is taxed like ordinary income, based on the person's tax group. Historically, C corporations have paid regular tax rates for all of their capital gains.


Other Forms of Capital Gains and Losses of Sales of Asset

Capital Assets

Everything one owns for personal use, pleasure or investment is capital good. This includes values, a residence; household furniture; a personal car; collections of coins and stamps; precious stones and jewelry, and precious metals. Since the property belonging to personal use is considered a capital asset, the sale or exchange of this property at a price higher than the purchase price or basis results from a capital gain, which is taxable. However, suppose someone suffers a loss for that property in a sale or exchange. In that case, the loss cannot be considered a tax deduction unless it results from a loss resulting from a personal accident, such as a fire, a flood, a tornado, or a hurricane. Other property types and investments also have irregularities in their treatment, such as capital gains or losses for tax purposes.


Investment property, collectibles, precious metals, and precious stones

All real estate investments are also considered an equity asset. Therefore, any gain or loss is usually a capital gain or loss, but only when it is realized, that is, after the transaction is concluded. For example, a person who owns shares in a growing tech company might find that those shares' price increases dramatically over time. However, for the profit to be realized, the investor must sell the shares at a market price higher than the original purchase price (or lower in the loss of capital). Section 1244 of the Internal Revenue Code treats losses on certain small business securities differently. If a loss is incurred, the investor can deduct the amount as a normal loss while reporting any gain as a capital gain.


Determining the Basis

Capital gain/loss is calculated based on cost, which is the amount of cash and debt obligation used to pay for a good and the fair market value of other goods or services the buyer has provided in the transaction. The purchase price of a property can also include the following fees and taxes, which are added to the base to arrive at the correct base:

  • Accounting and legal costs which are capitalized instead of expenses

  • Property taxes, if applicable

  • Recording speed

  • Revenue stamps

  • Sales tax

  • Settlement fees in real estate transactions

  • Shipping costs

  • Special taxes

  • Test fees and installments

 

How does Capital Gains and Losses of Sales of Assets Affect Business Owners

Individual shareholders or owners of companies who sell their shares or interests in the company also suffer capital gains or losses for those sales because capital gains and losses are different from operating gains and losses.

Operating profits and losses resulting from ongoing business activities. Sometimes called net operating losses (NOL) for tax purposes, they arise from day-to-day operations. Capital gains and losses arise from one-off transactions in which the business incurs profits or losses.



Dennis Jao
Contact This Member