Capital Gains Defined

Cite this article as:"Capital Gains Defined," in The Business Professor, updated December 12, 2018, last accessed May 29, 2020, https://thebusinessprofessor.com/lesson/capital-gains-defined/.

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Capital Gain Defined

A capital gain is the profit obtained from the sale of assets. When the sale price is higher than the acquisition price there will be a capital gain. However, when the sale price is lower than the purchase price, there will be a loss of capital.

  • Note: This section ignores the concept of asset depreciation.
    From the previous definition, we find a series of concepts that are necessary to analyze.

A Little More on Capital Gains

The assets where a capital gain can be generated are the following:

  • Financial assets: These assets are stocks, bonds, obligations, etc. It is in the transactions with these financial assets that most of the capital gains are generated.
  • Real estate: The other assets where capital gains can be generated are in real estate transactions, such as homes, lots, premises, etc.

As mentioned above, the capital gain (or loss of capital) is calculated as a comparison between two magnitudes: the price at which the asset is acquired and the price at which it is sold. The difficulty lies in the valuation of these prices.

Usually, the purchase price is the cost that we have borne when acquiring the asset plus all the expenses that are necessary for that purchase to take place. On the other hand, the sale price is usually the amount we receive from the buyer. However, this is not always the case. Sometimes, the IRS requires that certain assets be valued for their market value or pursuant to other criteria. Therefore, it’s necessary to take into account what the law requires for the valuation of an acquisition and the sale of the assets.

Capital gain is only realized when the asset is sold. the sale materializes. Although there has been an increase in the value of the shares, there is no capital gain if the asset is not sold.
Capital gains are potentially subject to two categories of taxation:

  • Long-term Capital Gains – This is either 0, 15, or 20%, depending upon the taxpayer’s individual tax bracket.
  • Short-term Capital Gains – This is the individual’s regular income tax rate on the marginal dollars received.

References for Capital Gains

http://www.businessdictionary.com/definition/capital-gains-tax.html
https://www.investopedia.com/terms/c/capitalgain.asp
https://en.wikipedia.org/wiki/Capital_gain
https://investinganswers.com/financial-dictionary/investing/capital-gain-1026

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