Taxable Income and Capital Gains Under Existing Tax Laws

Taxable income is not as easy or simple as it sounds. You can earn income in many different ways. One of the most common and difficult problems for the tax payer is to determine what accretions are and are not taxable income. There are certain types of income that require special treatment. Some categories of income give rise to special problems of definition, time-period determination, irregularity, cost elements, and administration. If such problems arise, the law must make the pragmatic adjustments that will collect the revenue due and yet be fair and equitable to those operating in special circumstances. Usually the legislatures and the courts indulge in a practical economic analysis of the characteristics of the particular type of accretion in determining how it should be treated for tax purposes. Some of the types of income that give rise to special difficulties are capital gains and losses, stock dividends, rental income, farm income, insurance proceeds, and many others. To know your rights, find a lawyer to discuss your issues.

In its wider definition, a capital asset is any asset or property held for the further production of wealth or as a source of income. The capital gain results when an asset is sold at a price higher than the price at which the tax payer purchased it. Broadly speaking, when the value of an assets increases from the time of purchase without there being any sale or exchange, it gives rise to capital gains. It is important to distinguish capital gain or loss from the sale of "goods" in the ordinary course of trade. In the case of the company whose business it is to produce and sell hats, any gain made from the sale of the hats is ordinary income. However if the company was to sell one of of its machines that it uses to produce hats, the situation would be very different. It would be the sale of a capital asset, subject to a capital gain or loss depending upon the price received for the machine. Any gain or loss from the latter sale is an unusual or irregular one arising outside the regular method of producing the company's business income. The tax statutes usually describe capital gains and losses as gains and losses from the sale of certain types of assets most of which conform to the economic concept. The federal "instruction sheet" defines capital assets as "all property" held by the taxpayer (whether or not connected with a trade or business), but it does not include (1) stock in trade held primarily for sale to customers in the ordinary course of trade or business, (2) real property "used" in the trade or business, (3) securities of governments in the United States issued upon a discount basis, and a number of other exclusions. Stocks are bonds are by far the more common type of capital assets. They serve the basis for well over 80 per cent of the capital gains reported in an average year. The second most significant item after stocks and bonds are rental real estate and private residences. Capital loss is not allowed on private residences. An experienced tax attorney can assist you determine your capital gains and losses.