What is the basis of an asset that is never depreciated?
That's tricky, actually. First, as the section 1015 that you've referred to in your other question says - you take the lowest of the fair market value or the actual donor basis. Why is it important? Consider these examples: So, if the relative bought you a brand new car and you're the first title holder (i.e.: the relative paid, but the car was registered directly to you) - you can argue that the basis is the actual money paid. In essence you got a money gift that you used to purchase the car. If however the relative bought the car, took the title, and then drove it 5 miles to your house and signed the title over to you - the IRS can argue that the car basis is the FMV, which is lower because it is now a used car that you got. You're the second owner. That may be a significant difference, just by driving off the lot, the car can lose 10-15% of its value. If you got a car that's used, and the donor gives it to you - your basis is the fair market value (unless its higher than the donor's basis - in which case you get the donor's basis). You always get the lowest basis for losses (and depreciation is akin to a loss). Now consider the situation when your relative is a business owner and used the car for business. He didn't take the depreciation, but he was entitled to. IRS can argue that the fact that he didn't take is irrelevant and reduce the donor's basis by the allowable depreciation. That may bring your loss basis to below the FMV. I suggest you take it to a tax professional licensed in your state who will check all the facts and circumstances of your situation. Your relative might be slapped with a gift tax as well, if the car FMV is above certain amount (currently the exemption is $14000).
Another disadvantage is the inability to value commodities in an accounting sense. In contrast with stocks, bonds and real estate, commodities don't generate cash flows and so any valuation methodology is by definition speculative. But as rhaskett notes, there are diversification advantages. The returns for gold, for instance, tend to exhibit low/negative correlation with the performance of stocks. The question is whether the diversification advantage, which is the primary reason to hold commodities in a multi-asset class portfolio through time, overcomes the disadvantages? The answer... maybe. A perpetuity in the mathematical context is the equation in your link. A perpetuity in the legal sense is a liability that never matures, presumably paying endlessly, except for a banknote that pays nothing.  An example would be UK war bonds during WWII. Real estate can be modeled like a perpetuity for convenience, but it is not a legal obligation to pay forever if one excludes taxes. If one starts with capital and ends with a perpetuity, one has bought a perpetuity.  If one starts out with nothing and ends with capital by way of a perpetuity, one has sold a perpetuity. "An endowment is a large chunk of capital (i.e. money) held by  a university or other nonprofit.  It is meant to hold its value forever against inflation, and invested to generate income: from interest, dividends and appreciation.   They seem like a contradiction: closely scrutinized by Boards of Directors, managed to a high and accountable standard, closely regulated -- and yet, invested aggressively for growth: ignoring short-term volatility to get the highest growth long-term.  The law, UPMIFA (P for Prudent), requires growth investment, and says taking up to 7% of current value per year is prudent, even in down times when total value is shrinking.  On average, this lets the endowment grow with inflation.  7% is the high end of ""prudent"".  An endowment is watched, and the taken income is adjusted to keep the endowment healthy. 5% is very safe, assuming the endowment must pace inflation until the heat death of the universe. If you plan to die someday, drawing an extra 1-2% is appropriate.  There you go.  Invest like a university endowment, and count on up to 7% per year of income.  That's $21,000 a year. There'll be taxes, but the long-term capital gain rate at $21,000/year is pretty low.  That's pretty tight, but possible if your idea of entertaining is Netflix.  It would work very effectively for #VanLife, or the British version, living on a Narrowboat." Never borrow money to purchase a depreciating asset. Especially don't borrow money that has penalties attached. To me this sounds like a transaction, where E already owns a company worth 400k and can therefore pocket the money from D and give D 25% of the profits every year. There is nothing objective (like a piece of paper) that states the company is worth 400K. It is all about perceived value. Some investors may think it is worth something because of some knowledge they may have. Heck, the company could be worth nothing but the investor could have some sentimental value associated to it. So is it actually the case that E's company is worth 400k only AFTER the transaction? It is worth what someone pays for it when they pay for it. I repeat- the 400K valuation is subjective. In return the investor is getting 25% ownership of the product or company. The idea is that when someone has ownership, they have a vested interest in it being successful. In that case, the investor will do whatever he/she can to improve the chances of success (in addition to supplying the 100K capital). For instance, the investor will leverage their network or perhaps put more money into it in the future. Is the 100k added to the balance sheet as cash? Perhaps. It is an asset that may later be used to fund inventory (for instance). ... and would the other 300k be listed as an IP asset? No. See what I said about the valuation just being perception. Note that the above analysis doesn't apply to all Dragons Den deals. It only applies to situations where capital is exchanged for ownership in the form of equity. "This forum is not intended to be a discussion group, but I would like to add a different perspective, especially for @MrChrister, on  @littleadv's rhetorical question  ""... estates are after-tax money, i.e.: income tax has been paid on them,    yet the government taxes them again. Why?"" For the cash in an estate, yes, that is after-tax money, but consider other assets such as stocks and real estate. Suppose a rich man bought stock in a small computer start-up company at $10 a share about 35 years ago, and that stock is now worth $500 a share. The man dies and his will bequeaths the shares to his son. According to US tax law, the son's basis in the shares is $500 per share, that is, if the son sells the shares, his capital gains are computed as if he had purchased the shares for $500 each. The son pays no taxes on the inheritance he receives. The deceased father's last income tax return (filed by the executor of the father's will) does not list the $490/share gain as a capital gain since the father did not sell the stock (the gain is what is called an unrealized gain), and so there is no income tax due from the father on the $490/share. Now, if there is no estate tax whatsoever, the father's estate  tax return pays no tax on that gain of $490 per share either. Would this be considered an equitable system? Should the government not tax the gain at all? It is worth noting that it would be possible for a government to eliminate estate taxes entirely, but instead have tax laws  that say that unrealized gains on the deceased's property would be taxed (as capital gains) on the deceased's final tax return." "If it's fully expensed, it has zero basis. Any sale is taxable, 100%. To the ordinary income / cap gain issue raised in comment - It's a cap gain, but I believe, as with real estate, special rates apply. This is where I am out of my area of expertise, and as they say - ""Consult a professional.""" "Tax cost basis is the amounts you've spent on developing the product which you hasn't deducted yet from previous income. From what you've described, it sounds like your cost basis is $0. Time you spent is not your cost, since time is not money. The fact that you might have earned something if working at that time but you didn't - is irrelevant, because potential income that you didn't get is not a loss that you took. Someone mentioned ""intangibles"" in the comments - that would be the line of thought of the buyer. However, since you didn't buy the product but rather developed it, you can only deduct the actual expenses you've incurred, that you haven't deducted so far." "For the USA part of the equation the ""fair market value"" is the value at the time you inherited it (time of death), and thus there is no capital gain." "The only ""authoritative document"" issued by the IRS to date relating to Cryptocurrencies is Notice 2014-21. It has this to say as the first Q&A: Q-1: How is virtual currency treated for federal tax purposes?   A-1: For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency. That is to say, it should be treated as property like any other asset. Basis reporting the same as any other property would apply, as described in IRS documentation like Publication 550, Investment Income and Expenses and Publication 551, Basis of Assets. You should be able to use the same basis tracking method as you would use for any other capital asset like stocks or bonds. Per Publication 550 ""How To Figure Gain or Loss"", You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property. Gain. If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain. Loss. If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss.  That is, the assumption with property is that you would be using specific identification. There are specific rules for mutual funds to allow for using average cost or defaulting to FIFO, but for general ""property"", including individual stocks and bonds, there is just Specific Identification or FIFO (and FIFO is just making an assumption about what you're choosing to sell first in the absence of any further information). You don't need to track exactly ""which Bitcoin"" was sold in terms of exactly how the transactions are on the Bitcoin ledger, it's just that you bought x bitcoins on date d, and when you sell a lot of up to x bitcoins you specify in your own records that the sale was of those specific bitcoins that you bought on date d and report it on your tax forms accordingly and keep track of how much of that lot is remaining. It works just like with stocks, where once you buy a share of XYZ Corp on one date and two shares on another date, you don't need to track the movement of stock certificates and ensure that you sell that exact certificate, you just identify which purchase lot is being sold at the time of sale." Some of the other answers mention this, but I want to highlight it with a personal anecdote. I have a property in a mid-sized college town in the US. Its current worth about what we paid for it 9 years ago. But I don't care at all because I will likely never sell it. That house is worth about $110,000 but rents for $1500 per month. It is a good investment. If you take rental income and the increase in equity from paying down the mortgage (subtracting maintenance) the return on the down payment is very good. I haven't mentioned the paper losses involved in depreciation as that's fairly US specific: the laws are different in other jurisdictions but for at least the first two years we showed losses while making money. So there are tax advantages as well (at least currently, those laws also change over time). There is a large difference between investing in a property for appreciation and investing for income. Even in those categories there are niches that can vary widely: commercial vs residential, trendy, vacation/tourist areas, etc. Each has their place, but ensure that you don't confuse a truism meant for one type of real estate investing as being applicable to real estate investing in general. "Straight Line Depreciation is the easiest method of depreciation, don't over think it.  Straight Line = (Assets Cost - Assets Salvage Value)/Useful life  In this case the Straight Line is $2m per year, it is not culmulative unless you are looking at accumulated depreciation account on the balance sheet.  Here is a schedule of the depreciation:  * Year 1 - $2m * Year 2 - $2m * Year 3 - $2m * Year 4 - $2m * Year 5 - $2m  See, can't get much easier than that!  Once you get into more complicated questions they'll throw tax rates at you and ask about cash flows, or the NPV of the cash flows.  You need to take into account the fact that the Depreciation is not a ""cash expense"" but it does affect cash flow by reducing the taxable income of the project.  Also, you need to consider the fact that the asset will be sold in year 5 and the value will need to be part of your cash flow and NPV calculations.  I hope this was helpful, if not I'll try to do my best answering any other questions.  Good Luck!" "Asset = Equity + (Income - Expense) + Liability Everything could be cancelled out in double entry accounting.  By your logic, if the owner contributes capital as asset, Equity is ""very similar"" to Asset.  You will end up cancelling everything, i.e. 0 = 0.  You do not understate liability by cancelling them with asset.  Say you have $10000 debtors and $10000 creditors. You do not say Net Debtors = $0 on the balance sheet.  You are challenging the fundamental concepts of accounting.  Certain accounts are contra accounts. For example, Accumulated Depreciation is Contra-Asset. Retained Loss and Unrealized Revaluation Loss is Contra-Equity." "There's an old saying:  ""Never invest in anything that eats or needs maintenance."" This doesn't mean that a house or a racehorse or private ownership of your own company is not an investment.  It just points out that constant effort is needed on your part, or on the part of somebody you pay, just to keep it from losing value.  Common stock, gold, and money in the bank are three things you can buy and leave alone.  They may gain or lose market value, but not because of neglect on your part. Buying a house is a complex decision.  There are many benefits and many risks. Other investments have benefits and risks too." "SEC filings do not contain this information, generally. You can find intangible assets on balance sheets, but not as detailed as writing down every asset separately, only aggregated at some level (may be as detailed as specifying ""patents"" as a separate line, although even that I wouldn't count on). Companies may hold different rights to different patents in different countries, patents are being granted and expired constantly, and unless this is a pharma industry or a startup - each single patent doesn't have a critical bearing on the company performance."