UK Accounting Glossary
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.)
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.
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.
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This glossary post was last updated: 4th February 2020.