Savvy taxpayers prefer to have their income treated as a long-term capital gain, rather than as ordinary income, because long-term capital gains are taxed at lower rates. I.R.C. § 1(h). Long-term capital gains are derived “from the sale or exchange of a capital asset held for more than 1 year.” I.R.C. § 1222(3). Not all assets, however, are capital assets; for example, inventory, “or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business” do not qualify as capital assets. I.R.C. § 1221(a)(1).
While the terminology sounds clear-cut, the dividing line between non-capital assets and capital assets rests largely on the facts and circumstances of particular cases.… Read More