Federal Tax

Capital Assets (Portfolio 561)

  • Capital Assets discusses in detail the provisions of §1221, summarizing its historical development, analyzing its definitions, and describing doctrines and other statutory provisions.


Bloomberg Tax Portfolio, Capital Assets, No. 561, discusses in detail the provisions of §1221. It summarizes the historical development of §1221, analyzes the definition of the term “property,” and describes certain traditional doctrines and other statutory provisions which affect the character of “property” and the tax treatment of a disposition of the property.

For an item to be considered a capital asset under §1221, it must qualify as “property” and must not be specifically excluded from capital asset treatment. There are eight classes of exclusions: (1) stock in trade (inventory); (2) depreciable or real property used in a trade or business; (3) certain self created and other copyrights, literary, musical or artistic compositions, letters or memoranda or similar property; (4) accounts or notes receivable acquired in a trade or business; (5) certain federal publications received without consideration or at a discount; (6) certain commodities derivative financial instruments held by commodities dealers; (7) certain hedging transactions which are clearly defined as such before the close of the day on which the transaction was acquired, originated or entered into; and (8) supplies of a type regularly used or consumed by the taxpayer in the ordinary course of the taxpayer’s trade or business. Long-term capital gain rates will apply for assets held for more than 12 months. There is no tax rate benefit available to a corporation that itself is subject to tax.

Table of Contents

I. Introduction
II. Historical Development of Section 1221
III. Statutory Analysis
IV. Section 1221(a)(1) – Stock in Trade, Inventory, and Property Held Primarily for Sale
V. Section 1221(a)(2) – Depreciable Property and Real Property Used in a Trade or Business
VI. Section 1221(a)(3) – Copyrights, Literary, Musical, or Artistic Compositions, Letters or Memoranda, and Other Similar Property
VII. Section 1221(a)(4) – Accounts and Notes Receivable
VIII. Section 1221(a)(5) – United States Government Publications
IX. Section 1221(a)(6) – Commodity Derivatives Held by a Commodity Derivatives Dealer
X. Section 1221(a)(7) – Hedging Transactions

Howard Rothman
Kramer Levin Naftalis & Frankel LLP
Pamela M. Capps
Kramer Levin Naftalis & Frankel LLP
Barry Herzog
Kramer Levin Naftalis & Frankel LLP
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