ChatGPT has trouble answering fundamental tax law questions but tries just the same

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I found ChatGPT initially very impressive. Still, I increasingly realize that it is more of a know-it-all in the sense of a person who behaves as if they know everything but really doesn’t. Why should you care? You can expect that machine-generated answers and advice will populate many financial, tax, and legal self-help sites. ChatGPT will not cite sources, making it look to some to be an ultimate source of original authority. Moreover, while ChatGPT’s grammar and style are bland, the English is correct. Consequently, there are no easy cues to alert you that the content may not be trustworthy. To illustrate, here is a very specific question I put to ChatGPT: Why does the tax code differentiate between capital assets and non-capital assets?


ChatGPT answer My answer (with sources)
“The tax code differentiates between capital assets and non-capital assets because capital assets, such as stocks and real estate, are typically held for a longer period of time and are subject to different tax rules than non-capital assets, which are generally items that are used in a trade or business and are expected to be sold or used up within a year. The tax treatment of capital gains, which are profits from the sale of capital assets, is generally more favorable than the tax treatment of ordinary income, which is the income earned from non-capital assets. This is because the government wants to encourage long-term investment, which can help to promote economic growth.” The Internal Revenue Code distinguishes between non-capital and capital assets. Unlike in financial accounting, the holding period of the assets is irrelevant to the definition. “Capital asset means property held by the taxpayer (whether or not connected with his trade or business), but does not include …”(1)). Almost everything you own and use for personal or investment purposes is a capital asset (2).The enumerated exclusions are designed to deny the recurrent and usually expected return on wealth, management, and entrepreneurship in the context of a business enterprise preferential tax treatment (3). For example, sales from inventory are a non-capital asset and as such do not receive preferential tax treatment, regardless of the holding period.


The longer than one-year holding period is important because it qualifies any gain on the sale or disposition of a capital asset (but not a non-capital asset) for the lower capital gains tax rate.

But as you can see, the holding period is not part of the IRS definition. ChatGPT confused and commingled a very specific question relating to the tax code with concepts from financial accounting. Compare this financial accounting definition: “Capital assets are real or personal property that have a value equal to or greater than the capitalization threshold for the particular classification of the asset and have an estimated life of greater than one year (4)”. That was not the question.

The main reason for the preferential treatment of long-term capital gains is the belief that this will increase, rather than decrease, tax revenue, a concept known to lawmakers long before Laffer made his curve famous (3, 5).

Good advice is not free, and idle chat will mislead you. Take your financial, tax, and legal problems to a licensed professional.


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