What Are Capital Gains and How Are They Taxed?
Capital gain arises when an asset is sold and is the difference between the basis (normally the acquisition price) and the sales price. Corporate stock accounts for 20 to 80% of taxable gains, depending on stock market performance. Real estate is the remaining major source of capital gains, although gain arises from other assets (e.g., timber sales and collectibles). The appreciation in value can be real or reflect inflation. Corporate stock appreciates both because the firm’s assets increase with reinvested earnings and because general price levels are rising. Appreciation in the value of property may simply reflect inflation. For depreciable assets, some of the gain may reflect the possibility that the property was depreciated too quickly. If the return to capital gains were to be effectively taxed at the statutory tax rate in the manner of other income, real gains would have to be taxed in the year they accrue. Current practice departs from this approach. Gains are not taxed until r
