A recent posting on the Economic Opportunity Institute’s Washington Policy Watch Blog wrongly claims that Initiative 1098 income tax proposal provides an exemption for capital gains on the sale of a business (link here).

In response to the question: “Would there be an exemption for capital gains income, such as someone selling their home or small business?” EOI provides this answer:

The short answer is: Yes. Under Initiative 1098, any potential income tax is calculated based on Adjusted Gross Income (AGI) as defined by the IRS, and federal tax law includes exemptions for capital gains income related to the sale of a home or business.

The correct short answer to the question is:

No. Capital gains income is not, in general, exempt from the I-1098 income tax. The only exception to this concerns the sale of a primary residence, where federal tax law excludes the first $250,000 in gain for an individual selling a primary residence ($500,000 for a couple) from AGI. Specifically, capital gains from the sale of a business are fully included in AGI and taxed just like ordinary income.

At the end of the post, EOI provides an example of the sale of a business that demonstrates that capital gains from the sale of a business are subject to tax. The example is concocted so that the tax due on the sale of the business is minimal. But this is the case because the value of the business is low, the business is owned by a married couple rather than a single individual and the business owners have no income other than the capital gain from the sale of the business. As result most of the gain from the sale is shielded by the exclusion of the first $400,000 of a couple’s income from the I-1098 tax.