A capital asset is a valuable item with long-term value owned by a person or a business, generally held for more than a year. Capital assets differ from items like inventory or office supplies used up or sold within the regular business cycle. For businesses, capital assets are typically things like machinery, buildings, or land, which contribute to the business’s ongoing activities and generate revenue over time.
There are two main types of capital assets:Â
Businesses keep these assets on their balance sheet and usually depreciate (spread the cost over time) or amortize (for intangible assets) their value to match the revenue they help generate.
Capital assets are the backbone of any business. The IRS treats capital assets differently from regular assets. Selling a capital asset (like a building or stock) for a profit will involve paying capital gains tax, while losses can sometimes be used to offset other gains, which can reduce tax obligations.
Since capital assets are long-term investments, they can also serve as a safety net. In tough times, they can be sold or leveraged (used as collateral for loans), to provide cash flow when needed without impacting daily operations​.
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