What is Capital Appreciation?

Capital appreciation occurs when an asset's value or price increases or rises above the value or price at which it was acquired. Capital appreciation is a common calculation used to assess capital gains tax when an asset is sold.

How does Capital Appreciation Work? 

The value of an asset may decline after it is acquired. If the asset declines in value, but later increases in value, capital appreciation only occurs if the value of the assets rises above the original value (or price paid) at the time of acquisition. Capital appreciation is the primary method of achieving or earning compensation in many trades or industries - such as stock trading or real estate investment. Individuals in such industries invest in an asset, wait or take steps to make the asset rise in value, then sell the asset. The difference between the purchase price and the price at which the asset is sold is the amount of capital appreciation.

Capital Appreciation, Basis, and Taxation

Capital appreciation is subject to taxation when the asset is sold. The definition of a sale is very broad and can include instances where the property is not actually sold in the traditional sense. When an individual acquires an asset by purchasing it, the price paid is the "basis" in the asset. If an individual receives the asset as a gift or inheritance, the basis will vary depending upon the circumstances of the transfer. Generally, the recipient of a gift takes the gifter's basis in the asset. The basis of property inherited can be increased to the value of the asset at the time of inheritance, depending upon the relationship between the decedent and the individual inheriting the asset. The tax rate for capital gain rates for assets held more than 12 months is 0%, 15% or 20% (long-term capital gain) depending on your taxable income and filing status. The capital gain rate for assets held less than 12 months is the individual or business's income tax rate. 

Example of Capital Appreciation of Stock

An investor invests in stock worth $10. After a year, the price of the stock increases to $15. With the price of the stock increasing to $15, the investor achieves $5 per share in capital appreciation. If he sells the shares, he will pay capital gains tax on the capital appreciation. Because he held the stock for more than 12 months, the rate of taxation with be the long-term rate (0%, 15%, or 20%), depending upon the individual's personal income tax bracket.