Question

It is essential to understand whether property is a section 1221 Capital Asset or if it is an Ordinary Asset. Explain what a capital asset is, and provide examples of both capital assets and ordinary types of assets.

Why do you think that we have separate reporting of capital gains and capital losses?

Answer 1

Capital asset is an property own by a person or taxpayer or a business which can be a building, plant, car, machinery, or bonds etc. It is basically all the long term and short term asset or property own by a business. When the asset is puchased it become capital for the business because it helps to grow the business and for the own production. It includes all the tangible and intangible assets. Intangible assets are those who cannot move or immovable such as Goodwill, patent, trademark etc. And tangible assets are those who are movable.

Capital Assets are cars, bonds, stocks, building, machinery, plant, home etc.

Ordinary assets are inventories, prepaid expenses, account receivables, cash, loose tools etc.

The capital gains and capital losses have a separate reporting because the buying or selling a capital asset is a big matter for which a person needs to seperate the with each other and then find out the losses and gains. Because of the capital gains a business needs to pay the income taxes ,which is not applicable for the aseests of personal use. So when the gains are more than the losses after the calculation the it is necessary to pay income tax.