Question

explain the differences in the calculation of Capital Gains for a commercial business compared with a private individual and give an example for each

Answer 1

The basic meaning of capital gains is same in both the cases. It simply means what one is earning on its capital investment. It can be simply understood as selling price - buying price of anything whether it may be any investment, tangible asset or any other thing. It this difference is positive its a capital gain other wise loss.

For a commercial business capital gains can be on investments which they make for various securities. There are some bonds or commerical papers that they mihgt have purchased at some point in time and now presenty it is returning more than its purchase value. A simple example can be, say if they buy a bond for say $ 1000 and today that bond is trading at $ 1200 in capital markets. So we can say there is capital gain of $ 200. NOte here we don't consider the intermediate gains on that bond like coupons etc. Simply the gain in price is the capital gain.

Another expample can be property plant and other tangible assets. A firm buys say a machine for $ 1000 and uses it for 4 years whereby it would depreciate it say on straight line basis for a depreciation of $ 200 per year. And along with this using that machine company has increased its production and made profits over the period. Now after depreciating at the end of four years salvage value of machine is $200 and suppose if the firm is able to sale it for $250 somehow, then this $50 is the capital gains for the firm.

Now for a private individual, capital gains would be simply change in prices. As I wrote about the investment in bond for a firm, the same would be the case for individual too. The best example for capital gains that can be used for individual is of gain in prices of a stock that he night have invested in. If he bought a stock at say $12 and today its $15, then despite of dividends he has booked a capital gains of $3 on that stock.

More or less its the same thinng for both a business and a person. The only difference can be only in valuation of tangible fixed assets for both.