Libvirt gives the definition of domain, i.e. it is an instance of OS running in VM. But then virsh domcapabilities reports the capabilities of this OS as well as underlying hypervisor, so domain definition is kind of blurred, it's on the boundary of virtualized OS and hypervisor?
A domain in libvirt jargon is a VM. In some other documents you can see the word guest as well. virsh domcapabilities tells you can features can be used for the virtual machine on that hypervisor.