CAPITAL ASSET

The term capital asset has three unrelated technical definitions, and is also used in a variety of non-technical ways.In financial economics, it refers to any asset used to make money, as opposed to assets used for personal enjoyment or consumption. This is an important distinction because two people can disagree sharply about the value of personal assets, one person might think a sports car is more valuable than a pickup truck, another person might have the opposite taste. But if an asset is held for the purpose of making money, taste has nothing to do with it, only differences of opinion about how much money the asset will produce.

With the further assumption that people agree on the probability distribution of future cash flows, it is possible to have an objective Capital asset pricing model. Even without the assumption of agreement, it is possible to set rational limits on capital asset value. In governmental accounting, it is defined as any asset used in operations with an initial useful life extending beyond one reporting period. Generally, government managers have a "stewardship" duty to maintain capital assets under their control. See International Public Sector Accounting Standards for details. In US tax accounting, it is defined as any property other than a list of exceptions.

The main exceptions are anything held for sale, and any real estate or depreciable property used in business. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. If something is a capital asset for tax purposes, gains or losses on sale or disposition are capital gains or capital losses. For individuals, however, capital losses on property held for personal use are generally not deductible. See the IRS publication Tax Facts about Capital Gains and Losses for details. A well-known financial accounting textbookadvises that the term be avoided except in tax accounting because it is used in so many different senses, not all of them well-defined. For example it is often used as a synonym for fixed assets or for investments in securities.

A common non-technical usage occurs when people ask that employees or the environment or something else be treated as a capital asset. In this context it means something managers have a responsibility to maintain, and to report changes in value as gains or lossesCapital assets should not be confused with the capital a financial institution is required to hold. This capital is computed from the right-hand side of the balance sheet while assets are found on the left-hand side.