Any accession to wealth, no matter what its source, is (or can be) included in a taxpayer’s “gross income.” However, not all taxable income is taxed the same. Notably, long-term capital gains 1 (or more accurately “net capital gain”) plus most dividend income of an individual is taxed at a lower rate than wage or salary income. Interest income derived from the bonds of state and local governments is not subject to any federal income tax. Certain other income derived from particular sources is subject to a marginal tax rate that is less than the tax rate applicable to so-called ordinary income. This encourages many taxpayers to obtain income from tax-favored sources and/or to try to change the character of income from ordinary to long-term capital gain income. The Code addresses some of these efforts.
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