Series 1: What are Capital Gains?

October 13, 2022

Capital gains are the profit you make from selling or trading a “capital asset.” With certain exceptions, a capital asset is generally any property you hold, including:

  • Investment property, such as stocks, bonds, cryptocurrency, real estate, and collectibles; and
  • Property held for personal use, such as a car, house, or home furnishings.

There are, however, various special rules that may affect your property’s classification or treatment as a capital asset. For instance, if you sell frequently to customers, your property might not be treated as a capital asset. Instead, it may be considered business inventory – and profits from the sale of inventory aren’t taxed as capital gains. So, watch out if you sell too many Gucci handbags or real estate investment properties, as these may be treated as inventory, and the tax on any gains will be at the higher ordinary income tax rates.

Similarly, if you sell or exchange depreciable property to a related person, your gains will be taxed as ordinary income.

In addition, intellectual property (e.g., a patent; invention; model or design; secret formula or process; copyright; literary, musical, or artistic composition; letter or memorandum, etc.) is not considered a capital asset if it’s held by the person who created it or, in the case of a letter, memorandum or similar property, the person for whom it was prepared or produced.

Source: Kiplinger