Capital asset

A capital asset is defined as property of any kind held by an assessee. It need not be connected to the assesse’s business or profession. The term encompasses all kinds of property, movable or immovable,

mutual funds, zero-coupon bonds etc. are all considered capital assets.^[1]^[2]

Excluded from the definition

Any stocks in trade, consumable stores, or raw materials held for the purpose of business or profession have been excluded from the definition of capital assets.
Any movable property (excluding jewellery made out of gold, silver, precious stones, and drawing, paintings, sculptures, archeological collections, etc.) used for personal use by the assessee or any member (dependent) of assessee's family is not treated as capital assets. For example, wearing apparel, furniture, car or scooter, TV, refrigerator, musical instruments, gun, revolver, generator, etc. is the examples of personal effects. (But see IRS publication 544 chapter 2.)
Agricultural land situated in rural area.
6.5% gold bonds or 7% gold bonds 1980, national defense gold bond 1980, issued by the central government.
Special bearer bonds, 1991
Gold deposit bonds issued under gold deposit scheme, 1999.
Security deposits issued under gold monetisation scheme 2015

Specific common definitions

In financial economics, a distinction is made between capital and other assets. Capital refers to any asset used to make money as opposed to other assets used purely for personal enjoyment or consumption. The goal of the distinction is to ensure personal taste does not play a role in valuation of capital. However, differences of opinion still are possible based on 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 an agreement, it is possible to set rational limits on capital asset value.^[3]^[4]
For United States Federal government accounting, capital assets have been defined including land (including parklands), structures, equipment (including motor and aircraft fleets), and intellectual property (including software), that have an estimated useful life (also known as service life) of two years or more. Capital assets exclude items acquired for resale in the ordinary course of operations or held for the purpose of physical consumption such as operating materials and supplies.^[5]
- The cost of a capital asset is its full
  life-cycle cost, including all direct and indirect costs associated with the planning, engineering, procurement including construction (purchase price and all other costs incurred to bring it to a form and location suitable for its intended use), operations and maintenance (including service contracts), and disposal.^[5]
- Capital assets may be acquired in different ways: through purchase, construction, or manufacture; through a lease-purchase or other
  capital lease, regardless of whether the title has passed to the Federal Government; through an operating lease for an asset with an estimated useful life of two years or more; or through an exchange. Capital assets include the environmental remediation of land to make it useful, leasehold improvements and land rights; assets owned by the Federal Government but located in a foreign country or held by others (such as Federal contractors, State and local governments, or colleges and universities); and assets whose ownership is shared by the Federal Government with other entities.^[5]
- Capital assets include not only the assets as initially acquired but also additions, improvements, modifications, replacements, rearrangements and reinstallations, and major improvements (but not ordinary repairs and maintenance).[5]
For State or Local governmental accounting in the United States with reference to
externalities
but as actual capital assets.
In some income tax systems (for example, in the United States), gains and losses from capital assets are treated differently than other income. Sale of non-capital assets, such as inventory or stock of goods held for sale, generally is taxed in the same manner as other income. Capital assets generally include those assets outside the daily scope of business operations, such as investment or personal assets. The United States system defines a capital asset by exclusion.^[7] Capital assets include all assets except inventory of supplies or property held for sale (including subdivided real estate), depreciable property used in a business, accounts or notes receivable, certain commodities derivatives and hedging items, and certain copyrights and similar property held by the creator of the property. The United Kingdom has an even broader definition.^[8]

US tax definition versus broader economic definition

A well-known

fixed assets^[10] or for investments in securities.^[9]

However this advice is questionable beyond the US private context. Several public sector standards in global use, notably

human development theory

.

Capital 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.^[9] See Basel III for a summary of how such requirements are proposed to be calculated.

References

^ "Public capital asset management: A holistic perspective". Emerald Insight.
^ "Asset Management and Capital Ownership on Firm Value: Through Profitability" (PDF). AFRE Accounting and Financial Review. 3 (1): 83–92. 2020.
^ Eugene F. Fama and Merton H. Miller, The Theory of Finance, Holt Rinehart and Winston (1974).
^ "Asset Management and Asset Valuation: The Implications of the Government Accounting Standards Bureau (GASB) Standards for Reporting Capital Assets" (PDF).
^ ^a ^b ^c ^d Office of Management and Budget (OMB) Circular A–11: Planning, Budgeting, and Acquisition of Capital Assets, Supplement-Capital Programming Guide.(2-14) Accessed at [1]
^ Governmental Accounting Standards Board Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, paragraph 19.
^ 26 USC 1221. Also see the discussion of capital gains and losses in IRS Publication 550.
^ See HMRC discussion of assets liable to capital gains tax.
^ ^a ^b ^c Clyde P. Stickney and Roman L. Weil, Financial Accounting, p. 622.
^ John Owen Edward Clark, Dictionary of International Accounting Terms, p. 98
^ David F. Robinson, "Human asset accounting", Long Range Planning, v. 7, i. 1, February 1974, Pp. 58-60.

[1] "Public capital asset management: A holistic perspective". Emerald Insight.

[2] "Asset Management and Capital Ownership on Firm Value: Through Profitability" (PDF). AFRE Accounting and Financial Review. 3 (1): 83–92. 2020.

[Fama-3] Eugene F. Fama and Merton H. Miller, The Theory of Finance, Holt Rinehart and Winston (1974).

[4] "Asset Management and Asset Valuation: The Implications of the Government Accounting Standards Bureau (GASB) Standards for Reporting Capital Assets" (PDF).

[OMBA-II-5] Office of Management and Budget (OMB) Circular A–11: Planning, Budgeting, and Acquisition of Capital Assets, Supplement-Capital Programming Guide.(2-14) Accessed at [1]

[GASB-6] Governmental Accounting Standards Board Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, paragraph 19.

[7] 26 USC 1221. Also see the discussion of capital gains and losses in IRS Publication 550.

[8] See HMRC discussion of assets liable to capital gains tax.

[Stickney-9] Clyde P. Stickney and Roman L. Weil, Financial Accounting, p. 622.

[Clark-10] John Owen Edward Clark, Dictionary of International Accounting Terms, p. 98

[Robinson-11] David F. Robinson, "Human asset accounting", Long Range Planning, v. 7, i. 1, February 1974, Pp. 58-60.

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Excluded from the definition

Specific common definitions

US tax definition versus broader economic definition

See also

References