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Capital Gains on Liquidation Assets [Section 46]

By Roger Ferguson

Posted June 29, 2024

When a company distributes its assets to shareholders during liquidation, this distribution isn’t considered a “transfer” for tax purposes under Section 45. This rule only applies if the assets are given directly to shareholders because the company is being liquidated.

However, if the liquidator sells company assets to generate funds and then distributes those funds, any capital gains from the sale are taxable for the company.

Section 45 Applicability For the Shareholders

When shareholders receive assets or cash from a liquidated company, they are taxed on the market value of those assets or the cash received. Any part of the distribution tied to the company’s accumulated profits is treated as dividend income and taxed under “Income from Other Sources.” This dividend portion is subtracted from the total received to calculate the taxable capital gains.

Capital Gains Tax on Future Sales by Shareholders

If a shareholder sells any asset received from the liquidation, the asset’s market value on the distribution date is considered the cost basis. This amount will be used to calculate any capital gains tax on a future sale of the asset.

    Page Contents

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    • Section 45 Applicability For the Shareholders
    • Capital Gains Tax on Future Sales by Shareholders
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