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1. Describe the rules governing passive income and passive losses 2. Present a technique of computing...

1. Describe the rules governing passive income and passive losses

2. Present a technique of computing capital gains and losses.

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Answer #1

1. Internal Revenue System (IRS) deals with the rules and treatment of passive incomes and passive losses.

(i) The passive losses that are generated without the passive involvement of the taxpayer can only be matched against passive income. No passive incomes means no deduction of passive losses.

(ii) only applied in the current year and can be only carried away forward.

2. To compute capital gain (irrespective of it being a short term capital gain or long term capital gain) or capital loss, we take the sale value and deduct these three items to get the capital gain/loss  : cost of acquisition, cost of Improvement and the expenditure incurred in the proceeding of transfer or sale.

negative number means its a loss. Otherwise its a gain.

Other way of computing capital loss is to subtract the sale value  from the cost of the asset sold.

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