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Suppose that you run a business in the United States that generates:

  • $0 in income
  • $100,000 in short-term capital gains
  • $20,000 in business expenses

Normally, you can deduct expenses against your income. But in this case, can your expenses be deducted against your capital gains? If not, how is this handled?

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  • 1
    How can a business generate capital gains with no income?
    – littleadv
    Jul 18 at 19:50
  • @littleadv This could happen in the case where assets appreciate more than the amount charged for services. A lawyer said that certain business structure themselves this way for tax efficiency.
    – Josh B
    Jul 18 at 20:17
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    @JoshB if you have a lawyer - why are you asking here? Isn't it what you pay the lawyer for?
    – littleadv
    Jul 18 at 20:32
  • No, I don't have an attorney who's guiding me. An attorney said this in a video that I watched.
    – Josh B
    Jul 18 at 21:24
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    An IRS form 1120 has capital gains on line 8 as part of total income. Now a company with more than 100 shareholders can have an investment portfolio, without being regulated as an investment company, if the portfolio is 60% Treasury Securities. However, the company needs a core purpose other than investment. Then consider a trading company with fewer than 100 shareholders that might be regulated as a securities-dealer. Maybe look at investment-club rules or commodity-pool rules.
    – S Spring
    Jul 18 at 21:56

1 Answer 1

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Generally, in the United States, business only generate capital gains as a by-side of their business activity. For example, you've sold a capital asset that you've been using in your business for a gain, or you invested your reserves and generated a gain.

A business that generates only gains is not a business, it's an investment.

For investment you can deduct some expenses, but it's limited. For example, expenses incurred prior to 2018 and exceeding 2% of your AGI can be deducted on your Schedule A for that year as an itemized deduction (this has been eliminated by TCJA, and is scheduled to return after 2025).

The only exception I can think of is being a day-trader, and for that there are specific rules.

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  • The concept of "carried interest" works so fund managers receive their performance fee as an allocation of assets. Therefore their management fee will be income whereas their performance fee will be capital gains. I'm wondering about the case of funds that charge little-to-no management fee, yet still incur significant business expenses.
    – Josh B
    Jul 18 at 20:19
  • @JoshB if there's little to no management fee, i.e.: little to no management, then how come such extensive short term gains? That suggest that a lot of trades occurred, or alternatively (for a fund) a quick exit, i.e.: no performance fee, only management.
    – littleadv
    Jul 18 at 20:37
  • I am not an expert in how funds work, but I think it is possible that a significant gain does not require many trades to occur. And if many trades did occur, would this change the tax treatment? You might even suppose it is long-term capital gains if that makes the question different in some way.
    – Josh B
    Jul 18 at 21:03
  • @JoshB you said you have an attorney who's guiding you. Why aren't you asking the attorney?
    – littleadv
    Jul 18 at 21:04
  • No, I don't have an attorney who's guiding me. An attorney said this in a video that I watched.
    – Josh B
    Jul 18 at 21:23

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