A capital asset as defined in Section 1221 of the Internal Revenue Code (IRC) that receives favorable tax treatment upon sale contains various exclusions such as inventory, property held for resale, property used in a trade or business, certain copyrights, and specific U.S. government obligations.
A capital gain is the profit that results from a sale of a capital asset, such as real estate, stocks, or bonds, where the sale price exceeds the purchase price.
A capital loss occurs when an investor sells a capital asset at a price lower than its purchase price. The capital loss is the difference between the selling price and the purchase price of the asset.
In an installment sale, the Gross Profit Ratio represents the relationship between the gross profit (gain) and the contract price. It is used to determine the taxable gain from each periodic receipt from the buyer.
Long-term capital gain refers to the profit earned from the sale of a capital asset that has been held for longer than a specified holding period, allowing it to qualify for favorable tax rates.
A short-term capital gain refers to the profit from the sale of a capital asset that was held for less than 12 months. Unlike long-term capital gains, these gains are typically taxed at higher rates corresponding to ordinary income.
