What are Capital Gains and Capital Losses for Businesses?

What are Capital Gains and Losses
What are Capital Gains and Losses. deepblue4you/Getty Images

There are two ways a business gains or loses money: 

1. The business makes a profit on its sales activities or loses money by spending more than it brings in from sales. 

2. The business gains or loses money through its investments or the sale of assets (items of value the business owns). 

Each of these types of gain or loss is taxed differently. Business profits are taxed as ordinary income and at the "regular" business or personal tax rate, depending on the type of business.

On the other hand, gains or losses on investments or the sale of assets are taxed as capital gains or losses. 

Capital Gains and Capital Losses

Capital Gains or Capital Losses are the gains or losses a company or individual experiences on the sale of a capital asset. In other words, if the sale price of an asset is higher than the owner's basis in that asset, the result is a capital gain. If the selling price is less than the basis, the result is a capital loss.

Capital gains and losses are also experienced when a business writes off an asset, that is, takes the asset off its balance sheet

Almost everything a business owns and uses as an investment is a capital asset. When a capital asset is sold for a profit, a capital gain results. If a capital asset is sold at a loss, a capital loss results.

For example, if a company purchases a building for $200,000 and sells it two years later for $300,000, the $100,000 is considered a long-term capital gain.

How do capital gains and capital losses affect shareholders and business owners?

Individual shareholders or business owners who sell their capital shares or owners equity in a business also incur capital gains or capital losses from those sales.

As noted above, capital gains and losses are different from operating gains and losses.

Operating profits result from the on-going operations of the business; operating losses (sometimes called Net Operating Losses (NOL) for tax purposes) also result from the day-to-day operations. Capital gains and losses, on the other hand, result from single transactions in which the business incurs a gain or loss.

Capital gains and losses come in two varieties: long-term and short-term. Short-term capital gains or losses are on assets held for a year or less before being sold. Long-term capital gains are on assets held for more than a year before being sold.

You might also want to read more about capital and the capital structure of a business. 

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