Almost everything individuals own and use for personal purposes or investment qualifies as capital assets. Homes, household furnishings, store equipment, computers, stocks and bonds are all capital assets. When a person sells a capital asset, the difference between the sale price and the basis in the property, which is usually its previous cost, is either a capital gain or a capital loss. A capital gain occurs when property sells for more than the basis. A capital loss occurs if the asset sells for less than the basis. Losses from the sale of property that was acquired for personal use such as a home or a vehicle are not deductible as capital losses.
Capital assets are any property held by a taxpayer except property that falls in one of the following categories:
- used in business and is depreciable
- stock in trade or inventory
- held primarily for sale to customers in the ordinary course of taxpayer’s trade or business
- certain copyrights, compositions, letters, and memorabilia
Basically, most assets not used in business are capital assets. Assets used in a business are capital assets unless they may be depreciated or are inventory items.
Whether an asset is held primarily for sale is a question subject of much litigation. If an owner is unsure of the status of an asset, he should consult his attorney or tax advisor. People need to remember that transactions involving stocks and bonds by someone who is not a dealer or an underwriter will always result in capital gain or loss, regardless of the frequency of sales. This rule affects so-called “day traders,” many of whom may not be aware of the tax laws as applied to their small-scale trading.