Book Value and Fair Value

• Book value is the asset's value as recorded on the accounts, while fair value is the asset's theoretical true value in consideration of the costs and benefits of its ownership. Most often, initial book value is recorded as being the asset's purchase cost because the open market is thought to be an accurate assessor of the asset's fair value. Both internal and external factors, such as wear and tear or changing demand, can create discrepancies between an asset's book and fair values.
  
  

Capital Assets

• Capital asset has no single definition, but several definitions. It can used to include only financial instruments such as stock shares in corporations and bonds and Treasury bills, but it can also be used to refer to long-term material assets such as land and the buildings built upon that land. Both definitions are relevant when determining capital loss.
  
  

Unrealized Gains and Losses on Capital

• Changes in the fair market values of assets can sometimes lead to changes in their book values. For example, if a business has $10,000 worth of stock shares purchased at $10 each and the market price rose to $20 each, that business would need to record a $10,000 increase to its investment and a corresponding $10,000 increase in its unrealized gains. Conversely, if the price had fallen to $8 per share, the business would have recorded a $2,000 deduction to its investment and $2,000 in unrealized losses. This practice does not apply to all capital assets and is largely restricted to financial instruments. Unrealized gains and losses are called such because the business has yet to sell the instruments and make those gains/losses happen.
  
  

Capital Loss

• Capital loss refers to the negative discrepancy between an asset's book value and its fair market value at the time of its sale. For example, if a building was bought for $20,000 and then sold for $12,000, that is a capital loss of $8,000. Capital losses are applicable to both long-term material assets such as buildings and land and to financial instruments such as stock shares and Treasury bills.