Final answer:
Temporary differences on investments as a result of preferential capital gain treatment for taxes can be classified into taxable temporary differences and deductible temporary differences.
Step-by-step explanation:
Temporary differences on investments occur when there is a difference between the tax treatment of an investment and its reporting for financial accounting purposes. In the context of preferential capital gain treatment, temporary differences can be classified into two categories:
- Taxable temporary differences: These are temporary differences that result in higher taxable income in the future. In this case, the tax treatment of the investment is less favorable compared to its financial accounting reporting. For example, if an investment is subject to a lower tax rate for capital gains, but its financial accounting reporting records a higher gain, there would be a taxable temporary difference.
- Deductible temporary differences: These are temporary differences that result in lower taxable income in the future. In this case, the tax treatment of the investment is more favorable compared to its financial accounting reporting. For example, if an investment is subject to a higher tax rate for capital gains, but its financial accounting reporting records a lower gain, there would be a deductible temporary difference.
It is important to note that these temporary differences may reverse in the future, resulting in changes to taxable income.