Capital Gains and Losses Research Paper Example | Topics and Well Written Essays - 2000 words

Capital Gains and Losses - Research Paper Example Other than inventory items, companies may end up in selling other assets. If the ‘other’ assets generate gains or losses, they are referred to as capital gains or capital losses (Hammer, 2013). A capital gain is, therefore, the profit realized by an investor from selling an asset at a higher price than he bought it.1 Companies may also decide to exchange assets in the absence of tax-free exchange rules. In such an exchange, capital gains or losses may be incurred. Capital gains receive a more favorable treatment compared to other types of income. According to Weltman (2011), tax law is more favorable on all incomes categorized as capital gains. Tax law also provides a special treatment for capital losses. Capital gains and losses are realized from capital assets. All property except inventory accounts receivable from the sale of inventory, depreciable property such as telephones, U.S. government publications, and real property used in the business are treated as capital assets. Most properties that one owns and uses for personal purposes or investments are considered to be capital assets. Examples of capital assets include cars, furniture, stocks, bonds, and houses. During the transfer of assets, if the amount received for the asset exceeds the adjusted basis of the property, a gain is recorded. If the amount received from the buyer is less than the adjusted basis of the property, a loss is recorded (Weltman, 2011). In order for the company to record either a capital gain or a capital loss, an exchange must occur. Though it may take hundreds of pages to define the tax code and limit what may be accounted for as capital gain or loss, the basic idea is simple. A capital gain is the increase in value of a capital asset. Cordes, Ebel & Gravelle (2007) define capital gains as the changes in value of capital assets such as real estate, business interest, or corporate stock. Gains and losses can either be