A capital gain is simply the profit you receive as a result of selling a capital asset. When there is sale of the asset after owning it for a short period of time, such sale results in short-term capital gain treatment. If sale of the asset takes place after holding onto it for a longer period, the sale of the asset receives the more favorable long-term capital gain treatment. Likewise, a loss from the sale of a capital asset can sometimes reduce tax liabilities.
While this seems fairly straightforward, the IRS seldom makes anything very simple. There are a whole slew of tax regulations that investors need to comply with to prevent the IRS from cracking down upon them. This includes Section 475 governing unrealized losses regarding such investment positions. This section particularly applies to securities mistakenly identified as investment positions.
Taxpayers must carefully identify each investment position to avoid noncompliance. Such recordkeeping is absolutely essential to prevent IRS scrutiny. However, even with such careful identification of investments, the IRS still may have grounds to prosecute you for other factors. It's therefore important not to mix up ordinary gain with capital gain when filing tax returns.
Even the IRS acknowledges that problems exist regarding compliance with Section 475. Nevertheless, avoiding problems with the IRS is always desirable. Therefore it's always wise to seek tax advice from skilled tax attorneys regarding any transactions that potentially lead to an audit or further scrutiny by the IRS. In the event of an audit or tax hearing, these attorneys are required to act in your best interest.