Define the term capital assets? Distinguish between short term and long term assets and give procedure to calculate capital gains??
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Answer:
Short Term Capital Gains are those gains that are realized after selling the assets within the purchase of 36 months whereas Long Term Capital Gains are those gains that are realized after selling the assets by holding it for more than the 36 months period
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**Capital Assets:**
Capital assets refer to any property or investment held by an individual or business for the purpose of generating wealth through capital appreciation or income. These assets can include real estate, stocks, bonds, mutual funds, and other types of investments. Capital assets are generally held for the long term rather than for day-to-day consumption.
**Distinguishing Between Short-Term and Long-Term Capital Assets:**
1. **Short-Term Capital Assets:**
- Held for a period of up to 12 months (or 24 months for certain assets).
- Examples include stocks, bonds, and mutual funds.
- Capital gains from the sale of short-term assets are considered short-term capital gains and are subject to a higher tax rate.
2. **Long-Term Capital Assets:**
- Held for more than 12 months (or 24 months for certain assets).
- Examples include real estate, gold, and certain types of bonds.
- Capital gains from the sale of long-term assets are considered long-term capital gains and are eligible for preferential tax treatment, often with lower tax rates.
**Procedure to Calculate Capital Gains:**
1. **Determine the Type of Capital Asset:**
- Classify the asset as short-term or long-term based on the holding period.
2. **Calculate Cost of Acquisition:**
- For assets acquired before April 1, 2001, use the fair market value as of April 1, 2001, or the actual cost, whichever is higher.
- For assets acquired on or after April 1, 2001, use the actual cost of acquisition.
3. **Calculate Cost of Improvement (if any):**
- Include the cost of any improvements made to the asset.
4. **Determine the Selling Price:**
- Consider the actual amount received or the fair market value of the asset at the time of sale, whichever is higher.
5. **Calculate Capital Gain:**
- For short-term assets, subtract the total cost (acquisition cost + improvement cost) from the selling price.
- For long-term assets, subtract the indexed cost (adjusted for inflation) from the selling price.
\[ \text{Capital Gain} = \text{Selling Price} - (\text{Cost of Acquisition} + \text{Cost of Improvement}) \]
or
\[ \text{Capital Gain} = \text{Selling Price} - (\text{Indexed Cost of Acquisition} + \text{Cost of Improvement}) \]
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