Character (income tax)
Encyclopedia
For purposes of calculating a taxpayer's tax liability, character is the type of income. In the U.S. the Supreme Court decided in Commissioner v. Glenshaw Glass Co.
Commissioner v. Glenshaw Glass Co.
Commissioner v. Glenshaw Glass Co., , was an important income tax case before the United States Supreme Court. The Court held as follows:...

 that income is an accession to wealth, however capital gain
Capital gain
A capital gain is a profit that results from investments into a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price. It is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the investor...

 is of different character from ordinary income
Ordinary income
Under the United States Internal Revenue Code, the type of income is defined by its character. Ordinary income is usually characterized as income other than capital gain...

. Ordinary income includes earned wage income and interest income from lending.

U.S.

The IRS characterizes income or loss as a capital gain or loss depending on how the taxpayer generates the gain or loss. When the taxpayer invests in real estate or a security
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...

 and then later sells that piece of real estate or security, the IRS characterizes the amount that exceeds the purchase price as capital income while the amount that falls short of the purchase price is capital loss. The IRS refers to the purchase price as the tax basis
Tax basis
The tax basis of an asset is generally its cost. Determining such cost may require allocations where multiple assets are acquired together. Tax basis may be reduced by allowances for depreciation. Such reduced basis is referred to as the adjusted tax basis. Adjusted tax basis is used in...

.

When the IRS characterizes income as capital gain, it enjoys a lower tax rate than ordinary income.

U.S.

The IRS characterizes ordinary income as income generated from earned wage income or interest income earned from lending.

The IRS taxes ordinary income according to a progressive rate determined by the amount of income. It is a progressive income tax.

See also

  • Internal Revenue Service Official website
  • Taxable income
    Taxable income
    Taxable income refers to the base upon which an income tax system imposes tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system. Many systems provide that...

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