Intuit Academy Tax Practice Exam

Question: 1 / 400

Which type of income is typically excluded from ordinary income?

Capital gains

Capital gains are indeed typically excluded from ordinary income. Ordinary income generally includes wages, salaries, bonuses, and interest income, which are all taxed at the individual's regular income tax rate. In contrast, capital gains arise from the sale of capital assets, such as stocks or real estate, and these gains are subject to different tax treatment.

When assets are held for more than one year, they are categorized as long-term capital gains, which usually enjoy lower tax rates compared to ordinary income tax rates. Short-term capital gains, earned from assets held for one year or less, are taxed at ordinary income rates, but it’s the long-term gains that are particularly significant in terms of how they are treated differently in tax legislation.

Thus, capital gains are distinctly characterized in tax regulation, making them the correct choice for types of income typically excluded from the classification of ordinary income.

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