Gain is a term used when a company or an individual experiences an economic benefit whereby there is either an increase in property or asset value. When the value of an asset is currently higher than when you purchased it, then the difference between the cost of purchasing and its current value is what is called gain. You are able to realize gain when there is an increase in the value of your investment.
- Gain is a term used to refer to an increase in the value of an asset or property.
- There are two types of gains; realized gains and unrealized gains.
- It is the net realized gains and not the gross gains that undergo taxation.
- Gains are subject to taxation only when there is selling of the property or asset and not when the owner still holds the asset or the property.
A Little More on What is Gain
Gains can be realized in various ways. It may range from an upward change in stock’s market price or gain on sale of land, and so on. Gain, therefore, is the extra cash or property’s fair value you get on exchange or sale of an asset.
Note that gain is usually received from something else other than your daily business operation earnings. In other words, it is a non-typical transaction where there are no recurring transactions. A good example of gains is when you purchase like say a piece of land, house or security, and after some years you are able to dispose of at a price above the purchasing price.
Also, when an asset is able to increase its value, this is considered to be gain even though there is no intention of selling it. Gain, therefore, may include a situation whereby, there is a company’s increase in asset value which is not related to sales.
How Gain Works (Example)
Let’s assume that an investor purchases 100 shares of Company ABC for $2 per share. After six months, the price of the share rises to $8. In this case, the investment’s value will have rose from $200 to $800. This means that the investor will have gained $600 from the shares he or she bought from Company ABC.
Types of Gains
Generally, gains are of two types; realized and unrealized gains.
Realized gains happen when there is an increase in asset’s value and that asset is disposed of at that value and then the extra amount which, in this case, is gain, is added to the company’s records. For instance, let’s say Company ABC purchased a piece of land at $24, 000 in the year 2010. The value of land was able to appreciate its value and the company was able to sell it at $44,000 in 2017.
This means that from the time the company purchased the piece of land to the time it was selling it, the land experience value increase. This is because the company was able to sell it at a higher price than the amount it paid when purchasing it.
Unrealized gains refer to where there is an increase in the asset’s value, however, there is no gain realization since the asset is not yet sold. In this case, the asset still appears on the company’s book as an asset even though its value has increased. For example, let’s say Company XYZ purchased 10 acres of land for $500,000 in the year 2000. By 2018, the evaluation of the property was estimated to be $900,000. The increase, in this case, is
considered to be an unrealized gain because, despite the land gaining value, it is still under the ownership of the XYZ Company. Meaning, it has not been sold for its gains to be realized.
Realized gains are taxable under “capital gains tax.” However, this taxation varies depending on the asset in question and the period taken to hold the asset. Also, when it comes to gains taxation, it is the net realized gains and not the gross gains that undergo taxation. When transacting stocks in a taxable account, the gain to be taxed, in this case, will be the difference between the purchase and sale price. This is after the brokerage commission has been considered.
Example of Taxable Gains
XYZ enterprise purchases 10,000 shares at $50 = $500,000
XYZ enterprise sells, 10,000 shares at $60 = $600,000
XYZ’s enterprise’s commission is $400
XYZ’s taxable gain will be $99,600 ($600,000 – $500,000) – $400)
Note that there are also non-taxable accounts such as Individual Retirement Account in the United States Registered Retirement Savings Plan in Canada. Gains from such accounts are not subject to taxation.
About Compound Gains
Compound gains which are also known as compound interest refer to the gains earned being added to the current gains. For example, let’s say $20,000 has been invested in security which gains 10% yearly, generating $2,000. In the year that will follow, it generates a 20% return, meaning the investment will generate $1,200 (12,000 x 10% gain), and so on.
Generally, compounding gains is one way of building wealth over time. However, how much you are able to gain will depend on the period you want your gains to accumulate. If as an investor you begin compounding gains when you are still young, there is always an opportunity for you to accumulate significant wealth.