Capital Assets – Section 1221
Capital assets can be classified into four separate categories for the ease of determining how taxable gains and losses are taxed.
Marketable Investment Assets – Stocks, bonds, mutual funds, land, stamps, coins and gems held for investment purposes.
Tax treatment of sales – Capital gains and capital losses
Gains and Losses can be used to offset each other, and the taxpayer can take an additional $3,000 loss per year ($1,500 if married filing separately).
Business Inventory – Inventory held for sale to customers and accounts or notes receivable.
Tax treatment of sales – Ordinary income and ordinary losses
Section 1231 Property – Depreciable residential rental property or trucks, autos, machinery, fixtures, computers or equipment used in a business.
Tax treatment of sales – Ordinary income or capital gains/ ordinary loss
Personal Items – Personal residence, jewelry, art, cars, furniture, baseball cards, coins, stamps and other collectibles used for personal use.
Tax treatment of sales – Capital gains/losses are non-deductible
Tax on all or part of the sale of the principal residence can be avoided if all requirements are met.
*Holding period rules will determine preferential tax treatment for most long-term assets over short-term held assets.
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