Capital Gains And Losses

Whenever we sell or exchange or dispose any property, realization takes place, and entity who owns property should calculate loss or gain which he incurred after property’s disposition. Provisions of income-tax which governs the transaction of property are considered significant portion of system of income-tax. Capital profits / losses are the outcome of disposition or sale of capital-asset. Following are accounting facets for the capital profits / losses.

Netting-Procedure for Capital profit / loss

The law of income-tax determines capital profit’s as well as loss’s treatment on yearly basis. This means that all the capital profits as well as losses which occurs at the time of a tax-year is being aggregated by prescribed procedure of netting for determining net result of every transactions of capital-asset for that year. Special treatment for tax is only applied to net effect for that year and not applied to transactions done individually.

Steps required for identifying gains or losses are:

• Identify gains or losses for that year and whether it is short term / long term.
• 2^nd step is reducing that year’s losses or gains into 1 net position of long term, either profit or loss, and 1 net position of short term, either profit or loss.
• After reduction of capital profits / losses, in 3^rd step comes reduction of that year’s capital profit position to one of the 2 i.e. loss or gain on the transactions of capital-asset for that year.
• After determination of the positions of capital profit / loss, all various forms of profits as well as losses are treated under special calculations rules of taxable-income as well as income-tax-liability of taxpayer.

Capital profit’s tax-treatment

While calculating income that is taxable, the net-capital profits are being added with gross-income. Discriminatory treatments allotted to various forms of profits of capital are used in calculating income-tax-liability. Net-short period capital-profits do not receive preferential treatments of tax and is taxed only at marginal rates of tax of taxpayer. At fifteen% adjusted-net-capital profit is taxed.

Questions:

• Define capital profits and gains.
• Explain how they are treated and taxed.