Individuals and Capital Assets

A person's capital assets include any sizeable possessions they own. A person realises a capital gain if they sell a stock, work of art, investment property, or any capital item and make money from the transaction. Individuals must record capital gains that are subject to a capital gains tax, according to the IRS.

Even a person's principal residence is regarded as a capital asset. On capital gains made from the sale of their principal residences, the IRS grants single filers a $250,000 tax deduction and married couples a $500,000 tax exclusion. An individual cannot, however, assert a loss resulting from the sale of their primary residence. A person can deduct a loss from gains if they sell a capital asset at a loss, but their losses cannot be greater than their gains. For example, if an individual buys a $100,000 stock and sells it for $200,000, they report a $100,000 capital gain, but if they buy a $100,000 home and sell it years later for $200,000, they do not have to report the gain due to the $250,000 exemption. Although both the home and the stock are capital assets, the IRS treats them differently.

Recording the Capital Assets

Transportation, installation, and insurance charges for the purchased asset may all be included in the cost of capital assets. If a business spent $500,000 on machinery but also had to pay $10,000 for transportation and $7,500 for installation, the machinery's true cost would be $517,500.

The Internal Revenue Service (IRS) views the acquisition of capital assets by a firm as a capital expense. Most of the time, businesses can subtract their revenue received during the same tax year from their expenses for that tax year, and then declare the difference as their business income. However, the majority of capital expenses must be capitalised as assets and written off to expense gradually over a period of years rather than being claimed in the year of purchase.

Instead of allocating the entire expense to the year in which the asset is purchased, a firm uses depreciation to expense a portion of the item’s worth over each year of its useful life. According to the matching principle of U.S. generally accepted accounting principles, the goal of depreciating an asset over time is to match the cost of the asset to the same year as the revenue it generates (GAAP). This implies that the expense related to using up the asset is recorded every year that the machinery or equipment is put to use. In actuality, capital assets depreciate over time. A company's book value for its assets may not match their current market worth depending on the rate at which it chooses to depreciate them.