Definition:
A capital gain is the profit realized from the sale of a capital asset at a price higher than its purchase price. It’s the difference between the selling price and the adjusted basis of the asset.
Key points about capital gains:
- Capital assets: Capital gains are realized from the sale of capital assets, such as stocks, bonds, real estate, or collectibles.
- Adjusted basis: The adjusted basis of an asset is its original cost plus any improvements made to it, minus any depreciation or amortization.
- Tax implications: Capital gains are generally subject to taxation.
- Holding period: The tax treatment of capital gains depends on the holding period of the asset. Short-term capital gains are taxed at ordinary income tax rates, while long-term capital gains are subject to lower tax rates in many jurisdictions.
Why are capital gains important?
- Investment returns: Capital gains are a significant source of investment returns.
- Tax implications: Understanding capital gains is important for tax planning, as the tax treatment of capital gains can vary depending on the holding period and other factors.
- Economic growth: Capital gains can contribute to economic growth by stimulating investment and consumption.
In essence, a capital gain is the profit realized from the sale of a capital asset at a price higher than its purchase price, and it’s a significant factor in investment returns and tax planning.
