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What to Know About Fungibility

Fungible

The fungibilty definition describes a process by which one commodity or good can be substituted with another. Wheat, precious metals and currencies are items which are considered fungible. The fungibility definition encompasses a wide variety of goods and commodities which can easily be substituted for one another by the same good or commodity, but not by another different one.

Fungibility differs from liquidity in which a good or commodity can be equally traded for a different one. A good or commodity is only fungible when it can be equally traded for the same exact good or commodity. Whereas, a liquid good or commodity can be traded for another, such as money being traded for a good.

An easily understood example of a fungible commodity is one United States dollar being traded for another. Whereas in liquidity, the dollar would be traded for another good or commodity, such as quarters or a good such as food.Gems are not fungible because there are always differences between gems and no two are exactly alike. However, Crude oil may be fungible if the oil is of the same quality.

Fungibilty can effect taxes, depending on whether the item , good, commodity or service can easily be traded for the exact same one. In other words, taxes applied to unique goods and services will be higher in direct proportion to the value of that commodity as an indication of whether or not it is unique or can easily be traded for one that is exactly the same.

NEXT: Economic Classification Relating to Taxes

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