Almost everything you own is a capital asset, except for property you use in your business.
Some examples of capital assets you might own are:
- Your investment property, including stocks, bonds, and mutual funds
- Your real estate that you don't rent out or use for business
- Your coin or baseball card collection
- The house you live in
- Your furniture and appliances
- Your automobile
- Your clothing
- Your library of books, your personal computer, and anything else you own, as long as you don't use it in your business
Capital Gains and Losses
When you sell a capital asset, the difference between what you bought the asset for (with some adjustments) and what you sold it for is the capital gain or loss. You may need to report any gain or loss on the sale.
What Is a Capital Gain?
A capital gain is your profit from selling something that went up in value. If you purchased a stock or bond for $1,000 and you later sell it for $2,500, you have a capital gain of $1,500. You will report the capital gain on your tax return the year that you sell your asset.
If, after all your capital gains and losses have been netted together, the result is a gain, you will have a capital gain for the year. Capital gains generally receive more favorable tax treatment than ordinary income.
What Is a Capital Loss?
A capital loss is the result of selling something that went down in value. If you purchased a stock or bond for $1,000 and you later sell it for only $600, you have a capital loss of $400. You will report the capital loss on your tax return the year that you sell your asset.
What Items Are NOT Capital Assets
Here's a list of the most common items that aren't capital assets:
- Equipment or real estate that you use in your business
- Your business inventory and accounts receivable
- Artwork, musical compositions, or writing that you created or that you received as a gift or inherited from the person who created it
- The part of your house that you use and depreciate as your home office, if it qualifies for a home office deduction
- Your property that you rent out to other people
- Your business automobile