(a) If you are engaged in a trade or business, you must, in determining your net earnings from self-employment, exclude any gain or loss—

1. (1) That is considered a gain or loss from the sale or exchange of a capital asset;
2. (2) From the cutting of timber or from the disposal of timber or coal, even if held primarily for sale to customers, if section 631 of the Code applies to the gain or loss;
3. (3) From the disposal of iron ore mined in the United States, even if held primarily for sale to customers, if section 631 of the Code applies to the gain or loss; and

4. (4) From the sale, exchange, involuntary conversion, or other disposition of property that is not—

   1. (i) Stock in trade or other property of a kind which would properly be included in inventory if on hand at the close of the taxable year; or
   2. (ii) Property held primarily for sale to customers in the ordinary course of a trade or business;

(c) For purposes of paragraph (a)(4) of this section—

1. (1) The term involuntary conversion means a compulsory or unintended change of property into other property or money as a result of such things as destruction, theft or seizure; and

2. (2) The term other disposition includes destruction or loss by fire, theft, storm, shipwreck, or other casualty, even though there is no change of the property into other property or money.

   Example:During the taxable year 1976, A, who owns a grocery store, had a net profit of $1,500 from the sale of groceries and a gain of $350 from the sale of a refrigerator case. During the same year, he had a loss of $2,000 as a result of damage by fire to the store building. In figuring taxable income for income tax purposes, all of these items are considered. In determining net earnings from self-employment, however, only the $1,500 of profit derived from the sale of groceries is included. The $350 gain and the $2,000 loss are excluded.