Capital Gains Determination
The sale of cut products is ordinary income unless certain conditions are met.
The first item to consider is whether you elected to "treat the cutting as a sale", a socalled Section 631(a) transaction.
Under a Section 631(a) timber owners who cut timber for use in their trade or business can, under certain conditions obtain capital gains treatment on the standing timber cut. The owner "buys" from himself the standing timber which he cuts . The sales price (internal transfer price) used to determine the gains is its fair market value on the stump. He then in essence sells it back to his trade or business at this same fair market value.
Did you elect to "treat the cutting as a sale"?