A painter earns his livelihood by selling paintings. Will his profit be taxable under the head “Capital Gains”? ......
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.....If so, what if he incurs a loss in a tax year?
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Capital gains refers to the increase in value of an asset over a period of time. This increase in value of the assets are due to reasons other than improvements or changes internal to the asset. For example, when the value of a house purchased by a person increases over a period just because of the prices of the property in the locality of the house have increased, there is no intrinsic change in the house. Therefore this increase in price of the house will be treated as capital gains. However if the person makes major renovations to the house after purchase of the house and the value of the house goes up by the amount equal to the cost of making these renovations then such increase in prices will not be considered as a capital gains.
In case of paintings made by an artists, the cost of making the painting consists primarily of the cost of material consumed for the painting, or any incidental costs such as travelling to the location depicted in the painting, or fees paid to person modelling for the painting. The painting is priced and sold above the cost incurred because of the way the artists uses the raw material of the painting. Thus there is a basic and intrinsic change in the asset, which in this case is a paining. Thus the addition to the value of painting beyond the cost of making the painting will not be treated as capital gains when a new painting is sold by the artist.
However it must be noted that if an artist repurchases his or her old painting and then resells it at a higher price, then this increase in price will be treated as a capital gains.
If in a tax year the artist sells new paintings at a total price which is less than the total cost incurred for creating these paintings, then the total difference between the two will qualify as the loss incurred during the period.