What is a Capital Asset?

Capital assets are tangible property that is likely to remain in the possession of the owner for an extended period time. Generally, these more or less permanent assets are used to provide permanent housing for the owner, or are utilized as part of a revenue generating process, such as the operation of a business.
A capital asset includes a wide range of assets that are considered to be desirable and of immediate use or worth to the owner. The assets are also expected to be in use for a long period of time. Most often, a capital asset is thought of as an asset that can be touched and used daily, like land and buildings. Real estate in general, from residential dwellings to commercial office buildings or manufacturing plants, would all qualify as a capital assets.

Along with buildings and land, a capital asset can also be any type of equipment that is used in the operation of a business. Machinery that is used in a manufacturing plant would be considered a tangible asset. A delivery vehicle also qualifies, since it is used to transport finished goods to the point of sale. Computer equipment, office furniture, and general office machinery could also be considered this type of asset, as they are all assets that are anticipated to be in use by the owner for a considerable amount of time, and aid in the process of running a business.

Investments can also qualify as a capital asset. Choosing to invest resources into a subsidiary company is one example. Infusing cash or other resources into the operation is expected to entail a long-term commitment, and hopefully will produce revenue for the investor at some point in the operation.
Capital assets are subject to a specific set of tax rules. Federal and state level regulations regarding capital gains and capital losses are applied on a consistent basis to these resources. This mixture of applying taxes to both capital gains and losses allows business owners to gain tax credits as the capital asset ages and becomes less valuable by allowing depreciation and eventually declaring the asset to be obsolete and eligible for replacement.
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Discussion Comments
You say that capital assets include land, buildings, and equipment used in the operation of a business, but IRC § 1221(a)(2) says that property used in a trade or business subject to depreciation, and real property used in a trade or business, are not included in the definition of a capital asset. Can you explain?
@stolaf23, that kind of capital asset inventory can also be used for determining your eligibility for student loans, other sorts of loans, and things like credit cards and many other forms of money transactions.
Capital assets are also used to determine things that relate to taxes, such as the amount of money a family might pay for their children to go to college. In order to determine possible aid from the government, families fill out a form called the Free Application For Student Aid, or FAFSA, and this requires you to name what your value is in several things, including property, investments, and bank checking and savings accounts.
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