What Can I Claim as Capital Assets?

Many of us are under the impression that we know what our client’s capital assets are. Many of us will be in for a surprise when we read the following list of what is not considered a capital asset. Do remember that stocks and bonds, mutual funds, primary residence and vacation homes that your client doesn’t rent out, jewelry and coin collections, and cars used for personal or business purposes are considered capital assets. Your client has the advantage of receiving long-term capital gains tax rate on the gains that your client makes off them if they held the assets for over one year.

Following are not capital assets:

  • If your client is a car dealer and selling cars is their business, your client can’t claim cars as their capital assets. Any thing that relates to your client’s trade or business cannot be claimed as capital asset if your client uses the item(s) everyday to make money. If your client is a jeweler, they can’t claims gems that reside in their store and that they sell everyday as capital assets. These are all considered short-term gain and your client pays higher income tax on these.
  • Rental property is considered part of your client’s business, hence is not considered to be a capital asset. The depreciation on the property claimed by your client must be subtracted from the long-term gains when they eventually sell the house. The depreciation lowers the amount of money that would be subject to the lower long term gains tax rate. All the depreciation is subject to higher tax rate.
  • Any creative work your client churns out, such as a novel or a musical composition is not a capital asset and is not subject to long-term capital gains tax rate, even if your client sold it a year after they created the novel.
  • Any publication purchased from the U.S. government and then sold at a profit is not a capital asset.