Category taxonomy is available for Item custom post type, each Item post can be assigned to one or more Categories.
To add new or find your created Categories, navigate to Items > Item Categories via main WordPress menu.
For each Category can be defined name (title), parent of Category if you are creating parent-child hierarchy of Categories and also description text which can tell more about created Category in short.
In addition, available are options to define Category Icon and Color. With these information is Category represented on the frontend of website. For example Item posts displayed on map which are assigned to the same category are represented on the map with marker colored in Category color and Icon defined for this Category.
Using Featured option you can mark category as featured. In appropriate blocks you can then show on the frontend only featured categories and not all of them.
Categories can be displayed on the frontend using Directory Categories List block.