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The Distribution of Asset Holdings and Capital Gains

“In 2010, more than 70 percent of families directly owned property designated under the Internal Revenue Code as capital assets—that is, assets that can be sold and that typically generate taxable capital gains or deductible losses when sold. Families’ capital assets included their homes, other real estate, privately owned businesses, stocks, corporate and government bonds (including Treasury bills and notes but excluding Treasury savings bonds), and mutual funds; those assets had a combined worth of $50 trillion. That amount does not include an additional $20 trillion of other family assets—such as the value of defined benefit and defined contribution retirement plans (for example, 401(k) plans) and balances in savings and checking accounts. When a capital asset is sold for more than its adjusted basis, the seller realizes a capital gain. (The adjusted basis is the amount of a taxpayer’s investment in an asset after adjustments to account for certain factors that change the amount of the initial investment for tax purposes; some factors, such as improvements in a property, increase the adjusted basis, whereas others, such as depreciation, reduce it.) When an asset is sold for less than its adjusted basis, the seller incurs a capital loss. If over the course of a year a family’s gains from all assets sold exceed its losses, those net gains can be subject to taxation; if, in contrast, a family’s losses exceed its gains, a portion of those net losses can be used to reduce the amount of other income that is subject to taxation. Most long-term capital gains (those realized on assets held for more than a year) are generally taxed at rates lower than those that apply to wage and interest income. In contrast, short-term gains are subject to the same income tax rates as wages and interest income. In 2010, taxpayers reported about $394 billion in short-term and long-term net capital gains, including those from sales of indirectly held assets (such as those owned by partnerships, S corporations, or mutual funds, or those managed by fiduciaries); they owed about $55 billion in federal income taxes on those gains. By comparison, the sum of reported net long-term gains and net long-term losses from the sale of directly held capital assets—the main focus of this report—amounted to $123 billion. In this report, CBO and the staff of the Joint Committee on Taxation (JCT) examine the distribution of capital assets and net capital gains and losses in 2010 by type of asset and by the income and age of the asset holder. The analysis of asset holdings is based on data from the Survey of Consumer Finances (SCF), a survey of the finances of U.S. families (consisting of a homeowner or renter, his or her spouse, and their dependent children) that the Board of Governors of the Federal Reserve System conducts every three years. To analyze capital gains reported by taxpayers on their returns, CBO and JCT used information from two different data sets compiled by the Internal Revenue Service (IRS). This report focuses on 2010 because it is the most recent year for which information was available from all three of those data sets at the time that the analysis in this report was undertaken.”

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