Denver Tax Attorney on: What is a Capital Asset?

What is a capital asset?  What is not a capital asset?  These are important questions, especially when selling, transferring or exchanging assets because the sale of a capital asset creates capital gain.  The article below discusses capital assets and non-capital assets.

It is likely that the majority of your personal possessions and investments are capital assets.  The list below provides examples of capital assets:

–          Your personal residence

–          Stocks and bonds

–          Household furnishings

–          Your cars used for pleasure or business

–          Timber grown on your property or an investment property

–          Stamp collections

–          Coin collections

–          Jewelry

–          Gold, silver and other metals

In general, property that is held for personal use is a capital asset and the gain from the sale or exchange of this property is considered capital gain.  However, loss from the sale or exchange of such property is not deductible as a capital loss.  You can only deduct a loss from personal use property when the loss is the result of a casualty or theft.

Investment property such as stocks and bonds (think stock in Google, Microsoft, GM etc) is a capital asset and the gain or loss from the sale or exchange of this property is deductible as a capital gain or loss.  However, this treatment would not apply to property that produces rental income.

Now that we have looked at capital assets and the gain and/or loss associated with these assets, what is a noncapital asset?  As you can probably guess, a noncapital asset is an asset that is not a capital asset and below are examples of noncapital assets.

–          Accounts or notes receivable acquired in the ordinary course of business for services rendered or from the sale of inventory or stock that is held mainly to sell to customers

–          Stock in trade, inventory and other property that you would hold primarily for the sale to customers in the normal course of business- see publication 538.

–          Depreciable property used in trade or business or as a rental property

–          Real property used in trade or business or as rental property

–          Copyrights, artistic compositions

–          Any commodity derivative financial instrument

–          Supplies that are regularly used and/or consumed in your ordinary course of business

The gain recognized from the sale or exchange of these noncapital assets is ordinary income.

If you have questions relating to the types of property you or your business may own, or the tax implications of the sale or exchange of personal or business property, you can speak with a tax attorney and business attorney by calling The McGuire Law Firm.

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