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What Is a Capital Gains Deduction?

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  • Written By: Osmand Vitez
  • Edited By: PJP Schroeder
  • Last Modified Date: 03 September 2016
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A capital gains deduction represents an item sold by an individual or investor in which the gain or loss on the item reduces tax liability. Due to the technical nature of tax deductions and the personal situation for each taxpayer, it is always best to seek tax advice from a professional. Understanding this concept prior to meeting with a tax professional is helpful, however. In many cases, many items owned by individuals or businesses carry the definition of a capital asset, which may include investments, securities, homes, vehicles, and similar items. Once sold, the difference between the item’s sale price and cost basis is the capital gains deduction, which may also be a loss.

The cost basis of an item is generally the original price paid for the good now in use by an individual or business. For personal items, this definition is quite simple to define; a receipt or bank statement that lists the item purchased for a given amount is sufficient to define its tax basis. Business items may require a bit more information in order to define the cost basis for the capital gains deduction. Tax laws may allow for the original purchase price and costs to ship, receive, and place the item into service to be part of the cost basis. While this increases the cost basis, the end result is a lower capital gain or larger capital loss, which is usually beneficial for tax purposes.

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A tax deduction is often removed from an individual's or business's adjusted gross income. Deductions are beneficial for tax purposes, though not necessarily when they lower the adjusted gross income on a tax form. A separate line is usually on each tax form that an individual or business must fill out. There is often an additional form or instructions that taxpayers need to fill out when claiming the capital gains deduction. The form and instructions provide a formula taxpayers can use to determine the amount they may claim as part of their overall deductions for a given tax year.

Different tax rates most likely apply to the capital gains deduction section on a tax form. The benefit here is often the fact that capital gains tax rates are lower than personal income tax rates or business tax rates. Additionally, limitations may exist for those taxpayers claiming losses on the sale of capital goods. In some cases, a taxpayer may need to spread capital losses among more than one year’s tax filings. Again, consulting a tax professional is essential to settling this matter for current and future tax filings.

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