Capital Gain

Business, Legal & Accounting Glossary

Definition: Capital Gain

Capital Gain

Quick Summary of Capital Gain

Capital gains are a profit amount by which the selling price of an asset surpasses the original purchase price of that asset. Examples of assets include bonds, stocks, mutual funds and real estate. Capital gains can be classified into two types: realized capital gain and unrealized capital gain. A realized capital gain is an investment that is already sold at a profit. An unrealized capital gain is that investment which has not yet been sold but would result in a profit after it is sold.

What is the dictionary definition of Capital Gain?

Dictionary Definition

In finance, a capital gain is profit that is realized from the sale of an asset that was previously purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, and property. (If the sale of the asset had yielded a loss rather than a profit, this loss would be called a capital loss.)

n. the difference between the sales price and the original cost (plus improvements) of property. Capital gains taxes can be a terrible financial shock to individuals who bought a house or business many years ago for the going price and now find it is highly valued, greatly due to inflation. Example: a couple buy a house in 1950 for $20,000 (then a high price) and upon retirement want to sell it for $400,000. There is a potential of tax on a $360,000 gain. There are some statutory cushions to ease this blow, such as a one-time $125,000 deduction from the gain (profit) on sale of real property if the seller is over 55, deferred (temporarily put off) tax if investment property is “exchanged” (profits are invested in other property) under strict rules, making lifetime gifts to children or charity, or buying another home. Another escape is death, which gives the property to heirs at the value on the day of the owner’s death without capital gains tax (“stepped-up basis”). Reduction of capital gains tax rates has been resisted by a majority of Congress, partly because lowering the rate generally would become a tax break for the wealthy.

Capital gains are often exempt from income tax, in which case it may be important to distinguish capital gains (or losses) realised on the sale of fixed assets (long-life assets that form part of the structure of a business, such as real property) from trading profits or losses realised on the sale of trading stock (short-life assets that are quickly sold on).

In many jurisdictions, including the United States and the United Kingdom, capital gains are subject to a capital gains tax.

Full Definition of Capital Gain

A capital gain is an increase in the value of an asset above its purchase price. Capital gains have special relevancy for Federal income taxes. The IRS considers almost everything you own a capital asset, and anytime you sell a capital asset above its “basis” – usually the purchase price – you have a capital gain. If you sell at a loss, you have a capital loss. If you’ve held the asset for more than one year, the capital gain is long-term; if less than one year, it’s a short-term capital gain. Capital gain taxes are determined by a formula that entails various nettings of short-term and long-term capital gains and losses. Further, a capital gain is only realized when a capital asset that has appreciated in value is sold; until the appreciated asset is sold, the capital gain is unrealized. That’s important because taxes aren’t due until a capital gain is realized. Also note that a capital gain is taxed at a lower rate than ordinary income, and thus taxpayers prefer that any reportable profits be considered a capital gain.

Long Term Capital Gain Or Loss

It is described as a gain or loss from an investment that is held longer than a year and subsequently sold. The monetary quantity difference between the sale value and purchase value is regarded as long term capital gain or loss. Long term capital gains are subjected to lower tax rates compared to short term capital gains.

Paper Profit Or Paper Loss

It is the unrealized capital gain or capital loss with respect to an investment. Paper profit (or paper loss) is computed by subtracting the specific security’s market price to the initial purchase price. It is to be noted that, gains or losses will be actualized only after the concerned security being sold.

Recognized Gain

A recognized gain is obtained when an asset or investment is sold at a higher monetary amount compared to the initial purchase price. The gains may or may not be taxable. Recognizing gains on a specific asset will initiate a capital gains condition if the concerned asset is determined to be capital in nature.

Round Trip Transaction Costs

It is described as all the costs linked with completing a specific transaction. The other name for the term is round turn transaction costs. Round trip transaction costs include market impact costs, taxes and commissions.

Taxable Gain

It is part of a sale that is applicable for taxation. An increase in asset values may result in taxation with respect to that asset.

Cite Term

To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
Modern Language Association (MLA):
Capital Gain. Payroll & Accounting Heaven Ltd.
February 02, 2023
Chicago Manual of Style (CMS):
Capital Gain. Payroll & Accounting Heaven Ltd. (accessed: February 02, 2023).
American Psychological Association (APA):
Capital Gain. Retrieved February 02, 2023
, from website:

Definition Sources

Definitions for Capital Gain are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 26th April, 2020 | 0 Views.