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Taxation of Capital Gains in Nepal: A capital gain is a profit derived from sale of capital assets. When the sale price is higher than original purchase price of a capital asset, there is a capital gain. The capital gain amount might be different in financial accounting and tax accounting due to difference in measurement of cost of assets. For the tax purposes in Nepal, the original purchase price is adjusted with the current index price to determine the tax base cost of a capital asset. The excess of proceeds above the adjusted cost of the capital asset is capital gain. The capital gain is taxed at capital gain tax rate. For example, land purchased 20 years ago for $ 10,000 is sold now for $ 2,000,000. Therefore, $1,990,000 (2,000,000-10,000) is a capital gain in the land in financial accounting. But for the purpose of tax as stated above in some countries like Nepal and India, the cost of land is brought to the current price a using reliable valuation method such as indexing. So, the capital gain amount in tax accounting is based on this current price. Let’s take the earlier example to calculate the capital gain in tax accounting. Assume that the base year index (20 years ago) is 100 and current year’s index is 15000 (adjusting for price inflation), the cost of the land is $1,500,000 (10,000*15000/100). So, capital gain for the tax purposes will be $500,000 (2,000,000-1,500,000).

What is a Capital Asset?

Capital assets are any kinds of long term assets which are not bought or sold (traded) in a regular business operation. There are two kinds of capital assets. One is an operating capital asset and other is a non operating capital asset. (1) The operating capital assets are lands, buildings, equipments, plants and machinery etc which are used in operation of business. These assets have long lives generally more than one year or operating cycle. These assets are also called long term capital assets. If these assets are held for a short period, they are called short term capital assets. A short period is a one year or one operating cycle which is higher. These assets are presented on the assets side of the balance sheet of a company or an individual or a firm. (2) The other kind of capital assets are non operating capital assets which are presented under the heading ‘investment’ on the assets side of the balance sheet of a company or a firm or an individual. Investment in shares, bonds or debentures are non operating capital assets. These assets are also long term or short term according to the holding period. The key element to distinguish whether the capital asset is long term or short term is the holding period and not the lives of the assets. Similarly, the lives of the assets do not distinguish the current assets or non current assets. The main criteria for this distinction are the nature, purpose of acquisition and use of assets in the business that determine whether the assets are noncurrent assets or current assets. Listed below are some criteria used to identify a capital asset. The features shown are used to determine the capital gains or losses from the transactions of the assets for the purpose of tax determination on capital or other gain and the concept is similar in accounting also. 1.	Asset is held for investment purposes and not for sale to customers in the ordinary course of trade or business. 2.	Nature and purpose of the acquisition of the assets. 3.	 Types of assets 4.	Uses The criteria differ from country to country based on their tax policies. Thus, the use and purpose of acquiring and selling of an asset plays a vital role for treating that asset as a capital asset. Comprehensive example, At the beginning of year 2005, Mike’s Auto Trader bought two cars ‘Toyota Corolla’ for $20,000 each. He kept one car in the Mike’s Auto Trader show room for the purpose of selling in the regular business operations of Mike’s Auto Trader. This car is a current asset and presented as an inventory item in its financial statement. Mike, the owner of the company used another Toyota Corolla for official purposes of the business. This car is a capital asset. Assets which are sold or bought in regular business operation of buying and selling are inventory but those used to help the business operation are capital assets. Let us assume that both cars were sold in the following year. The first car was sold for $ 25,000, and the second car was sold for $ 23,000. Net book value (carrying amount) of the second car in the year when sold was $16,000 ($20,000-$4,000 depreciation). But the book value of the first Car is equal to its original cost. Let’s find the capital gain, other gain and normal gain. First Car Normal gain = selling price- cost price = $ 25,000-$20,000 = $5000. There is no capital gain in the first car as it is an inventory item. Second Car Capital gain = selling price – original purchase price = $23,000-$20,000. =$3,000. Normal gain = original purchase price- net book value = $20,000-$16,000. = $4,000. Thus, there are two types of taxable income from sale of the second Car. One is capital gain and other is normal gain.