Capital Gains and Taxation Thereof

For tax purposes the sale of a capital asset results in a capital gain or loss.  Capital assets are generally those assets outside the daily operations of business.  Personal assets are capital, but you may not recognize a capital loss, or any kind of loss, from the sale of a personal asset...only gains. So, generally when discussing capital gains and losses we are talking about the sales of investment assets. 

Through the history of our tax system long term capital gains (defined now as gains on capital assets with a holding poriod of one year or more) have usually enjoyed preferential treatment.  Since 2001 that preferential treatment is in the form of a lower top tax rate...15%.

In a previous post I was making the point that dividend income, which, for the most part, also enjoys the 15% top rate, and capital gains, are virtually entirely enjoyed by the wealthy.  See the effective tax rates for Romney, Obama, Buffet, etc.  Non-wealthy people may have dividend income, and there are always exceptions to every rule, but I think that, for the most part, we can agree that middle and low and no income folks are generally not able to invest the amount of dollars it would take to earn enough dividends to make an appreciable difference in their income.

A comment to one of my posts made the following observation "It is not just the rich who profit from the capital gains rate. Any one who has a retirement plan that has money in the market does well by it. The effect of an IRA (loved by the middle class) is that the capital gain is not taxed at all."

There appears to be a misconception about taxation of various types of income earned by different types of legal entities  In fact, individuals are the only ones eligible to be taxed at the 15% top rates for dividends and capital gains.  Corporations have a series of special rates for dividend income but pay tax on capital gains at ordinary rates. 

When money is contributed to and income earned inside a retirement account, generally speaking, it loses its identity.  When it is then distributed it is distributed and taxed as ordinary income.  So there is no tax benefit to earning capital gains or dividends inside a retirement account.  I am baffled where the idea came from that the capital gain in an IRA is not taxed at all.  It is not taxed as a capital gain, but it is taxed at ordinary rates when it is distributed to the owner.  Perhaps I am misunderstanding the comment.