When an individual or business sells an asset, the gain or loss is classified into one of two distinct tax groups – ordinary or capital. The tax classification is strictly tied to the nature of the asset sold. For most businesses, the assets sold are inventory.
Ordinary gains, an Internal Revenue Code term, refers to a type of income that is taxed at regular income tax rates. Traditionally this includes earned income (wages), short term capital gains, rental income, business income and other forms of income where the taxpayer is actively involved.