Capital Gains Documentation

[John Ralls]

> On Dec 14, 2016, at 9:02 PM, Chris Good <chris.good at ozemail.com.au> wrote:
> 
>> Message: 2
>> Date: Wed, 14 Dec 2016 21:02:18 +0500
>> From: "David T." <sunfish62 at yahoo.com>
>> To: GNU Cash User <gnucash-user at gnucash.org>
>> Subject: Capital Gains Documentation, Redux
>> Message-ID: <1470DFA7-BE70-43B7-A11F-024F7C9B9398 at yahoo.com>
>> Content-Type: text/plain; charset=us-ascii
>> 
>> Back in October, John Ralls raised the possibility of removing the Guide
>> Chapter on Capital Gains as unnecessary. That discussion petered out after
> a
>> bit of discussion, but it seems as if the chapter lives on. I propose
> having
>> it
>> removed now.
>> 
>> David T.
> 
> Hi David,
> 
> IMHO there is some good stuff in there that should be kept. John had a 
> suggestion for recording unrealised capital gains on your house as a 
> commodity. I'm not sure of the implications of that but just for personal 
> finances, I'm wondering what exactly the disadvantages would be of recording
> 
> the unrealised gains in an Income:Unrealised Gains account as suggested by
> the 
> guide?
> 
> Wouldn't using a house commodity make it difficult to come up with a net
> worth that included your house? Even if this is only an estimate, it is
> useful to have.
> 
> How would a business do it? If using Income:Unrealised Gains is not how it 
> should be done in formal accounting, then we should change the documentation
> 
> to be correct. It would be good if some accountants could give us the
> benefit of their experience.

Chris,

Not exactly. What I proposed was creating a commodity for your house and entering prices for that commodity in the price editor. Since GnuCash's net worth tools, including reports, the Accounts page, and the summary bar, use prices to calculate current value you'll get the price-based net worth you're looking for without the pain of mark-to-market accounting [1], which isn't somewhere you want to go unless you must. 

How would a business do it? Depends on the business and whether they either have a regulatory requirement (as do some banks and financial companies) or see some other advantage (as did, notoriously, Enron and Arthur Anderson) to use mark-to-market. Failing that, meaning most ordinary companies and all "natural persons" (actual people), assets are accounted for at (depreciated if appropriate) cost until disposal. Depreciation is generally a deductible expense only for businesses. Gains are booked as income (sometimes a special kind of income depending on the nature of the asset and the jurisdiction) only when the asset is disposed of.

What's the problem with booking unrealized gains as income if you're not supposed to? It makes it harder to book the realized gains when you come to sell the asset because the tax man isn't interested in your unrealized gain income on which you didn't pay taxes: He wants to know what you originally paid, how much you depreciated the asset if you could and did, and how much you got paid when you disposed of it. If you've booked adjustments to the asset's value in the interim you'll have to undo all of those transactions to calculate the actual realized gain to pay your taxes. You'll also have an income account that you must remember to ignore when doing your taxes every year.


Regards,
John Ralls

[1] https://en.wikipedia.org/wiki/Mark-to-market_accounting <https://en.wikipedia.org/wiki/Mark-to-market_accounting>