capital gain handout Fall 2011

capital gain handout Fall 2011 - 1 Capital Gains Income Tax...

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Capital Gains Income Tax Accounting Fall 2011 This material supplements pages 3-28 to 3-35 of our textbook. Definition of a Capital Asset: Section 1221 of the Internal Revenue Code (the federal tax law) defines capital asset as anything other than the following: 1. Inventory, or other property held primarily for sale to customers in the ordinary course of a trade or business. 2. Depreciable property or real property used in a trade or business of the taxpayer. 3. Trade accounts or notes receivable 4. Certain copyrights, literary, musical, or artistic compositions, and letters, or memoranda held by the person whose personal efforts created them, and certain specified other holders of these types of property. 5. U.S. Government publications acquired other than by purchase at the price at which they were sold to the general public. Note this definition of capital asset also appears in our textbook on page 3-31. . . _____________________________________________________________________________________ Capital gains and losses occur when there is a sale or exchange of a capital asset. When a capital asset is sold at a gain there is a capital gain. When a capital asset is sold at loss there is a capital loss. A long-term capital gain occurs when a capital asset is held for longer than a year and is sold at a gain. A long-term capital loss occurs when a capital asset is held for longer than a year and is sold at a loss. A short-term capital gain occurs when a capital asset is held for a year or less and is sold at a gain. A short-term capital loss occurs when a capital asset is held for a year or less and is sold at a loss. When a non-capital asset is sold, any gain or loss is treated as non-capital gain income. This is usually referred to as ordinary income. This type of income can be taxed at the taxpayer’s highest marginal tax rate, that is, as high as 35%. The maximum tax rate on net capital gain (i.e., net long-term capital gain reduced by any net short-term capital loss) is 15% (0% for taxpayers in the 10% and 15% tax brackets). This will be illustrated in problems 7 and 8. ______________________________________________________________________________________ Capital Gains: Example 1 Assume that on June 9, 2011 Nelson sold 100 shares of X Corporation stock for $9,000. Nelson had purchased these shares four years earlier for $1,000. Under these circumstances Nelson has a long-term capital gain of $8,000. Capital Gains: Example 2 Assume that in 2011 Angela who owns a gift shop sold some inventory at a gross profit of $300. Under these circumstances Angela does not have a capital gain. She has ordinary income of $300. ____________________________________________________________________________________ 1 1
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The tax law provides that a net capital gain (NCG) is taxed in a favorable manner. To determine whether a taxpayer has a NCG the process works this way. Long term capital transactions (capital assets held >12 months) are separated from short term (capital assets held < 12 month or less). This results in two possibilities for short-term transactions and two for long-term.
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This document was uploaded on 11/03/2011 for the course ACCOUNTING 415 at Rutgers.

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capital gain handout Fall 2011 - 1 Capital Gains Income Tax...

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