Capital Gain - Explained
What is a Capital Gain?
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Table of ContentsWhat is a Capital Gain?How do Capital Gains Work? Academic Research on Capital Gains
What is a Capital Gain?
A capital gain is the returns acquired from the disposing of assets. Capital gain is achieved when the selling price is higher than the buying price. However, there will be a loss when the buying price is higher than the selling price.
- Note: This section assumes the idea of asset depreciation.
From the definition, we find a series of notions that are worth analyzing.
How do Capital Gains Work?
We can obtain capital gains from the following assets:
- Financial assets: They include bonds, stocks, obligations, etc. Most capital gains are generated as a result of transactions between these financial assets.
- Real estate: Capital gains can also be generated from transactions in real estates like premises, homes, and plots.
Capital gain or loss is calculated by comparing the buying price and selling price which are never easy to evaluate. Generally, the buying price refers to the cost that an individual pay when for the asset and all the expenses necessary for the purchase to take place. Conversely, the sales price refers to the amount the seller receive from the buyer. In some cases, the IRS provides that certain assets be valued for their market value or pursuant to other criteria. As such, it is important to take into account the provision of the law in the valuation of an acquisition and the sale of the assets. When the asset is sold, capital gain is also realized and the sale materializes. Even though there has been an increase in the value of the shares, no gain occurs when the asset is not sold. Capital gains are based on two categories of taxation:
- Long-term Capital Gains - This is 0, 15, or 20%, which is based on an individual's tax bracket.
- Short-term Capital Gains It refers to an individual's regular income tax rate on the marginal dollars earned.