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J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line by Barbara Weltman

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What Are Capital Gains and Losses?

The tax law generally looks more favorably on income classified as capital gains than on other types of income—at least for pass-through entities. On the flip side, the tax law provides special treatment for capital losses. To understand how capital gains and losses affect your business income you need to know what items are subject to capital gain or loss treatment and how to determine gains and losses.

Capital Assets

If you own property used in or owned by your business (other than Section 1231 property discussed in Chapter 6, or Section 1244 stock discussed later in this chapter), gain or loss on the disposition of the property generally is treated as capital gain or loss. Capital gains and losses are gains and losses taken on capital assets.

Capital assets
Property held for investment and other property not otherwise excluded from capital asset treatment. For example, your interest in a partnership or stocks and securities is treated as a capital asset.

Most property is treated as capital assets. Excluded from the definition of capital assets are:

  • Property held for sale to customers or property that will physically become part of merchandise for sale to customers (inventory)
  • Accounts or notes receivable generated by your business (e.g., accounts receivable from the sale of inventory)
  • Depreciable property used in your business, even if already fully depreciated (e.g., telephones)
  • Real property used in your business (e.g., your factory) ...

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