RFC: Chapter 8 Tutorial/Guide (depreciation, cap gains)

[Derek Atkins]

Jon Lapham <lapham at extracta.com.br> writes:

> Let me explain my logic for using the term asset appreciation.  (now,
> whether this logic is correct, I do not know )
> 
> For me, I see "asset appreciation" as the concept of an asset you own
> increasing in value.  For example, you suspect that a painting you own
> has increased in value from when you bought it.  Thus,
> *theoretically*, you have asset appreciation.  However, tax laws do
> not concern themselves with asset appreciation.  They want cold, hard
> numbers, which can only occur when you sell the asset.  At that
> moment, this nebulous "asset appreciation" becomes the IRS's "Capital
> Gains".
> 
> Does that sound right?

You've just described the difference (at least in the US) between
Unrealized- and Realized Capital Gains.  Replace appreciation with
depreciation and also replace Gains with Losses to go the other way.

> So, maybe what I should do, is try and use the term "capital gains"
> whenever possible.  Maybe only the intro to the chapter should mention
> asset appreciation, but thereafter use capital gains.

This sounds reasonable.  Also make sure to put it into the glossary.

> So, is there any tax implications to unrealized appreciation?  Or, is
> it tracked only so you know the potential value?

The latter.  There are no tax implications of the unrealized gains,
except there are tax implications when you sell (and realize the gains).
However, knowing what the unrealized gains are ahead of time can:

  a) show you your net worth
  b) show you what the tax implications are for selling at a particular
     point in time.

-derek

-- 
       Derek Atkins, SB '93 MIT EE, SM '95 MIT Media Laboratory
       Member, MIT Student Information Processing Board  (SIPB)
       URL: http://web.mit.edu/warlord/    PP-ASEL-IA     N1NWH
       warlord at MIT.EDU                        PGP key available