Thigpen, Jones, Seaton, & Co

Capital Asset Sales

By Spencer Tydings, CPA on December 12th, 2011

Capital gain treatment for the sale of assets can be an extremely beneficial tax advantage for a taxpayer.  Navigating the murky waters of capital assets can be difficult, however.  The tax treatment of capital asset sales gains and losses differs between individuals and corporations. Individuals, proprietorships, and partnerships are taxed at a lower rate for capital asset gains (capital gain). Corporations, however, are taxed at their ordinary tax rate. Capital asset sales losses are also treated differently among corporations and individuals, proprietorships, and partnerships. Additionally, the holding period (how long the capital asset was owned) can impact the tax rate.

Definition of Capital Asset
The use and treatment of property determines whether or not it is considered a capital asset. Assets for personal use are not considered capital assets. An asset must be used for income generation and not used in the taxpayer’s ordinary course of business. Investments in securities or other income generating materials such as gold or silver are considered capital assets. However, if the taxpayer buys and sells items such as gold or silver in his or her trade or business, they are not considered capital assets. If an asset is received as a gift or inheritance that would otherwise be considered a capital asset, it is taxed differently than if it were actually purchased.

Capital Gain Tax Consequences
When a capital asset is sold for a profit, the difference between the taxpayer’s original cost and the selling price is considered a capital gain. The profit or gain from the sale is taxed at a lower tax rate than the taxpayer’s regular income tax rate. However, there are some exceptions to this rule such as gains on sales of collectibles. There are also special tax rules for selling a capital asset for a loss.

Capital Loss and Tax Deductions
If the taxpayer realizes a loss from the sale of a capital asset, he or she may deduct up to $3,000 if married or $1,500 if single on his or her tax return. Keep in mind that the use of an asset determines whether the asset qualifies for capital loss treatment. An individual’s car or home does not qualify for a capital loss deduction. Losses exceeding the described limitations may be carried forward to future tax years.

Capital Asset Long-Term, Short-term Tax Treatment
How long a taxpayer owns a capital asset before selling it also affects the tax treatment of the profits from the sale. If the taxpayer has owned a capital asset for more than one year, it will be taxed at a different rate than a capital asset owned for less than one year.

Capital Gains and Losses for Corporations
When a corporation sells a capital asset for a profit, that profit is taxed at the corporation’s ordinary income tax rate. If the corporation sells the capital asset for a loss, that loss can only be used to offset the current and future year’s capital gains.

If you have any questions about this article, please do not hesitate to contact us.

Comments are closed.