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Long-Term Capital Gains

Scholasticus K
Investments and asset sales for the purpose of identification are often classified into categories based upon the time frame for which they were owned or held. Same goes for tangible and intangible assets. Long-term gains are the capital gains which are viewed in this regard.
Investments and all tangible or intangible assets are recorded on the asset side of the balance sheet. Liquidation of assets, that is selling them off, results into generation of a non-revenue income. This income from an asset that has been sold off can be classified in accordance with the time frame for which the asset was owned.

Definition

Long-term capital gains, as mentioned, are incomes from the sale of assets. In accordance with prominent accounting standards, bylaws and by different types of compliance by authorities such as the Internal Revenue Services (IRS), the meaning and definition of the long-termgains can be interpreted as follows. Take a look.
  • Firstly, this type of income is generated from assets which have been invested into or, held or owned by the company for time period which equals or exceeds a period of 12 months. In some nations and under some jurisdictions, the long-term gains, must span over an entire (financial) year, that is the opening date and the closing date of the year.
  • Secondly, being characterized as capital gains, these gains/incomes need to be received on a non-regular basis and also need to be incurred, not from the regular business of the organization. Apart from that they should be of a substantial amount.
  • The third feature is that they should not be a part of the regular revenue of the business. For example sale of a 5 year old pizza oven is a long-term capital gain, however a mass order of 1,000 pizzas is not a long-term capital gain, as this kind of income has been received in the due course of the business, and is a regular deal.
Thus in a nutshell, a long-term capital gain is chiefly, an income from the sale of an asset or an investment, which has been owned by the individual or a company for over a year, or 12 months and does not account to be an income from the regular business. The sale can be of almost any asset under the sun.
In the United States the long-term capital gains taxation rate ranges from 5% to 20%. On the whole, long-term gains are subject to lesser rates of tax, than the short-term ones, as per the progressive taxation system.

Examples of Long-Term Gains

The following are some of the common and prominent examples of long-term gains. Have a look.
Stock which has been held by a person or a person for a period which is not less than 12 months (i.e: exactly 12 months or more) is chiefly a long-term gain.
In case if the purchase, holding and sale of the stock does not account to be the regular part of the individuals, or organization's business or operations, then the said sale of stock, if at profit, becomes a long-term capital gain.
Similarly, sale of share of a mutual fund or any such investment scheme, gold, silver and bonds and securities, all account to be long-term gains.
On several occasions, companies liquidate important fixed and tangible assets, such as large machinery, real estate or any such other asset is connoted to be a long-term capital gain.
Some of these assets, such as machinery are sometimes not sold at book value or are sold at a depreciated value or at a loss. In such cases, they come under the category of long-term capital loss. The same rule is also applicable for stock and other such instruments.
The sale of other intangible non-investment assets, such as copyrights and patents is classified under this kind of gain. Again if these assets are sold at a loss, a long-term capital loss is indicated.

Computation of Long-Term Gains

So how do you know, whether we are making a gain or loss while selling a certain asset or investment. Here's the formula for the computation.

Total Profit = Total Price of Sale + Total Returns (such as dividends for stock) (-) Total Depreciation/Fees/Commission/Charges (-) Purchase Price of the Asset/Investment
There is also a method to find out how much percentage long-term capital gain you have made. In such a case, the following formula can be used.

Total Yield (-) Total Investment/Investment

Well that was that. While filling up your form 1040, you too, would have to include the long-term gains in it, if you have any, as a declaration to the IRS.