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Capital Gains

Capital Gains

  • Term

    Main definition

  • Capital Gains

    Earnings that constitute taxable income for purposes of the United States Internal Revenue Code, as amended, incident to a sale or exchange of property where the property is classified as a capital asset (ie., either held for investment or used in a trade or business, and excluding assets sold by a dealer of that kind of asset from its inventory). Earnings or losses for income tax purposes are measured in terms of the difference between the seller's net proceeds and the seller's tax basis in the property.

    Usually, an investor prefers to defer capital gains taxes as long as possible so that the untaxed value of the asset can grow and compound. Legitimate capital gains deferral is the primary purpose of every Tax-Free Corporate Reorganization and every Section 1031 Exchange. But ultimately, many transactions of that kind are taxable, and in that case if the capital asset was held for one year or more then the investment earnings would be further classifiable as long-term capital gains. A capital asset held for one year or longer, when sold, results in the earnings that are recognized being taxed at a lower rate than the tax rates on ordinary income.

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