Capital Gain

Capital gain refers to the increase in the value of a capital asset when it is sold. To put it in simpler words, a capital gain occurs when one party sells an asset for more money than what they originally paid for it. Most of the assets a business owns are capital assets: Consider investments for example (stocks, bonds or real estate) or something purchased with the intention of aiding daily operations (machinery). However, capital gains are only realized when you sell an asset, you can determine them by subtracting the original purchase price from the sale price. In these cases, the Internal Revenue Service (IRS) can tax these transactions under certain circumstances. In most scenarios, capital gains are taxed based on the amount of time the asset was held: Short-term (12 months) and Long-term (more than 12 months). The first are usually charged at the ordinary business income rate and the second at around 15%. Another important thing to note is that businesses can do the same with expenses: If a certain asset depreciates during the fiscal year, companies can reduce the amount of their income taxes by deducting ordinary losses and capital losses from ordinary income. Since corporations are required to pay taxes when they earn money, incurring in a net operating loss entitles them to several forms of tax relief. Capital gains must be included in corporate tax returns.

Generally, capital gains are associated with investments such as stocks or bonds since they have greater volatility than more traditional assets such as machinery or tools. Nonetheless, capital gains can be realized on any type of asset: car, land, etc when they are sold. It is important to note that these transactions trigger what is called “taxable event”, meaning that you will owe taxes to the government after you sell or realize the gain on the asset. Normally, when a business is big or realizes too many complex transactions, it is advisable to have an accounting department to help with the intricacies of reporting capital gains properly. Furthermore, loses can also be leveraged to optimize yearly tax returns.

The key takeaways we can take from this is that a capital gain only occurs when the asset in consideration is sold, if not it is unrealized and the same happens with loses. They can be applied to any type of assets but can also be used to enhance tax returns in favor of the business.