Facts
In 1984, Herbert, a collector of rare coins, bought a 1916 Spanish Bowlero for $2,000. He sold the coin for $4,500 in January. He made a gain amounting to $2,500. On retiring from his loading dock job in June, Herbert actively began buying and selling rare coins. By December, Herbert had realized a gain amounting to $21,500 from his business of selling rare coins.
Issue
What type of taxable income was January’s $2,500 gain?
Conclusion
The type of the taxable income that Herbert made in the month of January amounting to $2,500 was a capital receipt or gross receipt.
Analysis
Once capital assets are sold, the gains received are referred to as capital or gross receipts. Generally, gross receipts are taxable as they are considered a form of income resulting from the sale of capital assets. United States Code (U.S.C.) 1221 defines capital assets as properties held by the taxpayers, whether used for business or trade, or otherwise. Herbert bought the Spanish Bowlero and later sold it realizing a gain amounting to $2,500. According to R.C. 5751.01 (F) (2), the receipts from the sale of assets defined in the IRC 1221 and 1231 should not be included in the definition of gross receipts. Further, subsection (A) (2) provides that assets used by the taxpayer in his trade or business should not be defined as capital asset. As a result, the respective gross receipts from such assets should not be subject to Commercial Activity Tax (CAT). In addition, when an asset is not a capital asset and the taxpayer realizes a gain from its sale, all the gains are subject to the CAT.
According to the Ohio Department of Taxation Information Release (2008, para.1-2), section 1221 precludes various properties from the definition of capital goods. These involve stocks included in the inventory or any other property held by the taxpayer with the primary objective of disposing them in the process of operation. In addition, the supplies which the taxpayer consumes during the business operation are also excluded as capital assets.
The description in I.R.C. 1221 specifies that capital assets consist of non business properties which belong to the owner who is the taxpayer. These capital assets are largely used for personal or investment purposes.
Summary
According to the definition advanced by IRC, capital assets include assets which are held by the taxpayer either for personal or business use. The gains received from these assets are referred to as gross or capital receipts and are either subject to CAT or not depending on the classification of the capital asset. In this case, Herbert was a collector of rare coins from his loading dock job when he bought the Spanish Bowlero. Nowhere in the case study do we see Herbert using the Spanish Bowlero in his business and therefore, qualifies to be a capital asset. Consequently, the gains from the transaction should fall under the definition of gross receipts. Hence, these gross receipts should be subjected to CAT.
Reference
Ohio Department of Taxation Information Release. (2008). Assets excluded from gross receipts. Web.