Capital gain

3 Key Takeaways

• Capital gain is the profit realized when an asset is sold for more than its purchase price.
• It is subject to capital gains tax in many jurisdictions, although rates and exemptions vary.
• Capital gains can be short-term (held for a year or less) or long-term (held for over a year), with different tax implications.

What is Capital Gain?

Capital gain is the positive difference between the selling price of an asset and its original cost basis (purchase price plus any associated costs). For example, if you bought a share of stock for £10 and sold it for £15, you would have a capital gain of £5.

Importance of Capital Gain

• Investment Returns: Capital gains are a primary source of profit for investors, alongside dividends and interest. They are essential for building wealth and achieving financial goals.
• Taxation: Capital gains are subject to taxation in many countries, with varying rates and exemptions depending on the jurisdiction and the type of asset.
• Economic Growth: Capital gains can stimulate economic activity by encouraging investment and risk-taking.

How Capital Gain Works

Capital gains are calculated by subtracting the cost basis of an asset from its selling price. The cost basis includes the original purchase price plus any expenses incurred to acquire, improve, or maintain the asset.

There are two types of capital gains:

• Short-term Capital Gain: This occurs when an asset is sold within one year of purchase. Short-term gains are typically taxed at the investor’s ordinary income tax rate.
• Long-term Capital Gain: This occurs when an asset is held for more than one year before being sold. Long-term gains often receive preferential tax treatment, with lower tax rates compared to ordinary income.

Examples of Capital Gain

• An investor buys shares of a company for £20 per share and sells them for £30 per share, realizing a capital gain of £10 per share.
• A homeowner purchases a property for £200,000 and sells it for £300,000, making a capital gain of £100,000.
• An art collector buys a painting for £5,000 and later sells it for £15,000, earning a capital gain of £10,000.

Real-World Application

Capital gains play a significant role in personal finance, investment strategies, and government revenue. Investors seek to maximize capital gains while minimizing taxes through careful planning and portfolio management. Capital gains taxes contribute to government revenue and can be used to fund public services and infrastructure projects.