What Is It?
Scope of This Discussion
This discussion is intended to assist you in determining the sections of the Internal Revenue Code (IRC) that govern the nature of gain or loss when assets, particularly business assets, are sold. This discussion only summarizes how gain or loss is actually treated under these specific sections. You should consult additional resources for details.
This section defines capital assets as any property held by a taxpayer other than:
- Inventory items, or other property held for sale to customers
- Property used in a trade or business that can be depreciated under Section 167 of the IRC, or real property used in a trade or business
- Copyrights, literary, musical, or artistic compositions, or similar property held by the person who created them
- Accounts receivable acquired through normal business operations
- Certain U.S. government publications
- Certain commodities derivative financial instruments
- Hedging transactions
- Supplies regularly used or consumed in the ordinary course of a taxpayer's trade or business
This section refers to depreciable personal property and real property used in a trade or business held for more than one year. It doesn't include:
- Inventory items
- Property held for sale to customers
- Copyrights or literary and musical compositions held by the person who created them
- Certain US government publications
If the gains on the sale or disposition of Section 1231 assets in a taxable year exceed the losses on the sale or disposition of such assets, the net gain is treated as long-term capital gain. On the other hand, if the losses on the sale or disposition of Section 1231 assets in a taxable year exceed the gains on the sale or disposition of such assets, then the net loss is treated as an ordinary loss.
Section 1239 provides rules on gains from the sale of depreciable property between certain related taxpayers.
Section 1242 governs the treatment of losses on certain small business investment company stock. Losses are treated as ordinary losses. (Taxpayers generally prefer tax losses treated as ordinary, rather than capital, losses.)
This section allows certain small business investment companies to characterize certain losses as ordinary losses.
Section 1244 allows an individual taxpayer to treat certain losses on qualified small business stock as ordinary losses. Under Section 1244, an individual may treat losses on stock issued to such individual (or a partnership of which he or she is a member) as ordinary losses up to $50,000 per year ($100,000 for married filing jointly). Qualified small business stock is defined as stock in a domestic corporation that meets a number of qualifications, including the following:
- The stock was issued as Section 1244 stock by a business corporation with $1,000,000 or less in contributed capital
- The stock was issued in exchange for money or property other than stock and securities
- During the five-year period before the date the loss was sustained, less than 50 percent of the corporation's gross receipts came from royalties, rents, dividends, interest, annuities, or stock sales
Section 1245 treats gains from the disposition of certain depreciable property as ordinary income. Property subject to Section 1245 includes depreciable personal property, certain tangible assets, certain real property (not including a building or its structural components), a single-purpose agricultural or horticultural structure, a petroleum storage facility, and a railroad grading or tunnel bore.
This section treats a portion of any gain from the disposition of certain depreciable real property (other than real property described in Section 1245) as ordinary income. Gains as a result of accelerated depreciation (as opposed to straight-line depreciation) are treated as ordinary income. Gains as a result of straight-line depreciation receive capital gains treatment, assuming that the property has been held for more than one year.
Section 1252 recharacterizes certain gains from the disposition of farmland as ordinary income.
Section 1253 provides rules for characterizing gain or loss from the transfer of franchises, trademarks, and trade names.
Section 1255 recharacterizes certain gains from the disposition of Section 126 property as ordinary income. (Section 126 property is property acquired, modified or improved with tax-exempt funds derived from certain federal programs.)
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