A Conceptual Framework for Capital Gain

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Calvin H. Johnson


Qualification for preferential tax rates on capital gain is “fuzzy at best and incoherent at worst.” The primary governing statute provides that sale or exchange of “property” yields capital gain, with only narrow exceptions. Under traditional understanding, however, capital gain does not include income, including rent, interest, compensation, and periodic business income, even though such income is received on the sale of something reasonably considered to be “property” in nontax contexts. A conceptual framework is needed that brings both courts and congressional rules into consistency and produces principled results; this Article presents such a framework. The proposed framework assumes that the capital gain preference will remain. It draws its principles from the wisdom of current law but then criticizes some judicial and congressional results as anomalies inconsistent with those principles. The framework is organized into five strings, with each string representing a separate rationale. The Article then briefly explores three situations where there would no room for a capital gains preference: under a consumption tax, under a mark-to-market system, and under repeal of step up in basis at death.

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