Capital gain or ............?

Question

In a State, you are allowed to sell up to 3 cars without a dealer's license. And you sell up to 3 cars a year. Would the money you make considered as taxable income or capital gain?

http://en.wikipedia.org/wiki/Capital_gain

In Canada, if you are selling 2 to 3 cars a year, you are definately considered as running a business. I am not sure what the tax law is in the US. But if you are selling up to 3 cars a year, you are holding the car for an average of 3 months and sell it. I am not sure how the profit can be considered as capital gain.

Answer 1

The answer depends on why you are selling the cars.

Are you holding the cars for sales to customers? Then regardless of whether you are required to get a dealer's license, the cars would not be capital assets, they are inventory. You would report your profit and loss on Schedule C. You would deduct your expenses such as mileage to car auctions, and repairs to the vehicles prior to sale. Net profit would be self-employment income subject to 15.3% Social Security and Medicare taxes in addition to ordinary income tax.

If you are not holding the cars for sale to customers, then they are personal assets. The gain on the sale of personal assets is reported on Schedule D and you would pay capital gains taxes (up to 15% if you held the cars for more than one year, ordinary income tax rate if one year or less). You cannot add repair costs to the basis of the cars you sell, you cannot deduct expenses related to the purchase of the cars, such as advertising or travel.

Answer 2

For a dealer it's taxable income. Since you are not a dealer, it's capital gain. As a practical matter, there's no difference unless you owned the car for over a full year as the rates are the same. The downside is that a loss is not deductible whereas a dealer's loss on any one vehicle -- and it does happen -- offsets gains from the sales of others.

Answer 3

It would be a taxable gain.