Capital assets include land, buildings, machinery, computer equipment, vehicles, and things a business needs to produce its goods or provide services. The term also refers to an asset on which capital gains tax must be paid if it is sold off.
The term initially meant any fixed assets held for the long term and not likely to be turned into cash for a business’ operation. However, many tax authorities use the term for a wide range of assets, including stocks.
The benefits gained from a capital asset are expected to extend for longer than one year. On a company’s balance sheet, capital assets are represented by the equipment, plant and property figure.
Companies rarely sell their capital assets
Capital assets are rarely sold
Capital assets are only sold by a company when it is in serious trouble, such as one in bankruptcy proceedings.
In asset-intensive industries, like oil exploration, firms tend to invest a major part of their funds in capital assets.
A capital asset has the following features:
– it is not easily convertible into cash,
– its useful life is expected to last for more than one year,
– unlike inventory, it is not typically sold as a normal part of business operations,
– its cost of acquisition exceeds a company’s capitalization limit (company-designated minimum amount).
Tax authorities’ definition of Capital Assets
As far as the United States’ Internal Revenue Service (IRS) is concerned, nearly everything we own and use for personal purposes, investment or pleasure is a capital asset. The IRS says it considers the following items as capital assets:
– shares (stocks) and bonds,
– a home occupied by a person and his/her family,
– timber grown in a person’s home property or investment property, even if they make casual sales of the timber,
– all the furniture within the household,
– a car used for commuting or pleasure,
– stamp or coin collections,
– gold, silver, platinum, and other metals,
– gems and jewelry.
Definition of capital gain: If you buy a capital asset for $10,000, and then sell it one year later for $15,000, you have made a capital gain of $5,000.
Video – Types of capital assets