Capital

Question: What is Capital?

Answer: Capital is money or other assets from which income can be derived in the future such as an IRA, CD, checking account, savings account, and credit cards. Capital can be cash on hand, equity in real estate, such as a home or investment property, the cash value of an insurance policy, stocks, bonds, mutual funds, money in a 401k, SEP, and/or other retirement plans.

In certain segments of business, corporations or individuals, capital is considered to be wealth that is derived from past business activity. It is the sum of monies that are available, after expenses, taken from the monies used to produce more inventory.

Question: Is Capital Taxable?

Answer: Capital is taxable, depending on how it is derived and used. The gains on capital may be taxed as long term or short term and it may depend on the classification of assets and other property involved.

Question: What are capital gains?

Answer: The Internal Revenue Service (IRS) defines capital gains as the net amounts of taxable income gained, in terms of the value of assets, over the liabilities and losses that are associated with the assets if they are sold, exchanged, or traded.

Question: What are capital losses?

Answer: Capital losses are the deductions and liabilities taken against capital gains when an asset is sold, traded, or exchanged.

Question: What are long term capital gains?

Answer: Long term capital gains are realized on gains and losses from assets that are held for more than one year.

Question: What are short term capital gains?

Answer: Short term capital gains are gains and losses that are realized on assets that are held for less than a year.

Question: Are there distinguishing forms of capital?

Answer: There are several forms of capital such as circulating, fixed, liquid, frozen, productive, and financial.

• Circulating capital is money and other assets that are used to purchase goods such as fuel and raw materials. It is also used to pay wages, benefits, and other business related expenses.
• Fixed capital are assets that are more durable, such as buildings, machinery, and land.
• Liquid capital are assets that can be readily converted into cash if it becomes necessary. Liquid asset may be stocks, bonds, finished products, and other goods that may sold or traded.
• Frozen capital are assets like buildings and land that cannot be easily or readily converted to cash.
• Productive capital consists of machines and raw materials that are used to increase productivity and capacity.
• Financial capital are the liens and claims against corporate securities and account receivables.

Finance Topic of the Month: Managing Money