Understanding Capital Gains and Losses in Taxation
Capital Gains and Losses
Extending the notion of income includes gains (capital gains) or losses (losses) obtained by transmitting a heritage item of the taxpayer.
Capital Gains and Losses: Questionable Cases
Capital Gains Totally or Partially Absent
Capital Gains Caused by Inflation
The taxpayer sells a part of their heritage, e.g., their home, and gets a price much higher than originally paid for it. The difference between the purchase prices and sales are assumed due to the inflation process that affects the housing market, and the question is whether this gain is real or fictional. This situation is more apparent than real. E.g., a man bought his house for 90,000 €, 5 years later, he sells it for 120,000 €. Apparently, it has generated a surplus of €30,000 that should be taxed with other income sources. But he wants to buy a house with the same characteristics and should spend the amount of 120,000 € on their new home, so we cannot say that a profit is generated.
The gain value is obtained:
Corrected Purchase Price = Purchase Price x Corrective Coefficient
Gain on Sale = Sale Price – Corrected Purchase Price
Capital Gains Caused by Changes in Interest Rates
This course is more complex, as we illustrate with an example. A taxpayer acquires fixed-income securities amounting to €10,000; such evidence has secured a 10% annual interest. The taxpayer will perform:
Yield (1,000) = Interest Rate (10%) x Nominal Value (10,000)
This performance will get the saver no matter what happens with interest rates. If once bought these securities, the rates fall, the new obligations are issued that offer lower performance. If, for example, the interest rate drops to 8%, the new obligations of 10,000 € only offer a yield of 800 €. The owner of 10% has issued a most valuable title that is now being sold in the market, and now may seek a higher price than buying.
If we compare the purchase price of buying and selling, the saver receives a surplus of €2,500 (1,000 / 0.08 to 10,000). You can sell your title for 12,500, buying a new requirement, which paid €10,000, and devote full consumer surplus value, maintaining its heritage.
However, for some farmers, such as loans, the taxpayer is not in the same circumstances at the beginning and end of the operation (table).
If we are concerned only with the record of assets, it is true that goodwill of 2,500 is a real income, but if the taxpayer is interested in not only the value of the assets but also the performance obtained from them, not all surplus value is an income in a strict sense, it is not in the same situation according to the measurement principle, hence stating only part of this surplus should be taxed.
Capital Gains Taxed in Other Taxes
We refer to cases where the capital gains are already taxed in other taxes and it does not make sense to bring capital gains to income tax.
Capital Gains Generated by Public Sector Action
It refers to situations where increasing the value of taxable property is due to public works or the establishment or expansion of public services. The difficulty is that such assumptions are the taxable event of a specific tax, special contribution. To the extent the taxpayer has paid for this increase in property values, it should not be subject to new tax through income tax, or at least should be considered as deductible from income tax amounts already paid in the form of special contribution.
Capital Gains Generated by Corporate Saving
It is a case of an increase in shareholder value generated by corporate saving societies. The value of an action can be defined from different viewpoints:
- Nominal Value: Represents the share of equity for each title. When building a company, or enlarged, the partners make a contribution to the existence of the new entity. The amount of initial debt of the company with respect to their owners is called social capital; this is divided into deeds, stocks, so it is true:
Nominal Value x Number of Equity Shares = Equity
Nominal Value = Equity / Number of Equity Shares
- Theoretical Value: Represents what each partner would correspond to if society is closed out. The theoretical value would then be:
Theoretical Value = (Social Capital + Reserves) / Number of Shares
Theoretical Value = Social Capital / Number of Shares + Reserves / Number of Shares
Theoretical Value = Nominal Value + Reserves / Number of Shares
Increased reserves raise the theoretical value above the nominal value. But these reserves are nourished with society’s benefits, which have already been taxed at the corporate tax. Therefore, it has no sense to tax them on income tax.
- Capitalization Value: Represents what you are willing to pay for a degree that generates a return, in the case of dividend shares, over time. If the saver believes the shares will pay a dividend, be willing to pay such a figure X:
X * r = z
X = z / r
In this case, a dividend reduction, through the work of the tax, reduces the value of capitalization of the company, and therefore the capital gains generation. If this limitation of the dividend is due to corporate tax, it is also affected directly and can obtain capital gains. Again it is unnecessary to encumber the capital gains in an independent manner.