Capital Gains Tax – What is a “Capital” Asset?

As you may know, long-term (1+ year holding period) income gains produced by capital property are taxed at a lower rate than an individual’s ordinary income. Individuals paying income tax in at least the 25% tax bracket pay 20% rates on such gains while low-income earners do not pay a capital gains tax. What many taxpayers overlook, though, is that the tax benefit requires that the gain-producing asset be a capital one. Capital assets are more or less permanent and are utilized as part of a revenue generating process, such as the operation of a business.

Generally, everything a taxpayer owns or uses for either personal or investment purposes is a capital asset. This includes stocks and bonds, principal residences, secondary or vacation residences (unless producing rental income), household furnishings; automobiles used for personal purposes or work commuting, and jewelry. In other words, many assets qualify for the reduced tax rate. Still, relatively common assets such as property, stock or supplies used in the taxpayer’s business, accounts receivable, copyrights, and are a few that do not qualify.

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