Capital Gain

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Term Definition
Capital Gain

The profit realized from selling an asset for more than its purchase price

A capital gain refers to the profit you make when you sell an asset for more than you paid for it. This can apply to various assets, including:

  • Stocks: When you buy a stock at a certain price and later sell it for a higher price, the difference is your capital gain.
  • Real estate: If you buy a house for $200,000 and sell it for $250,000, your capital gain is $50,000.
  • Collectibles: Selling a rare stamp for more than you bought it for would also result in a capital gain.

Key points to remember:

  • Realized vs. unrealized gains: A capital gain is only considered "realized" when you actually sell the asset. Until then, any increase in value is just an "unrealized gain" and doesn't count towards your taxable income.
  • Taxes: Depending on your location and how long you held the asset, capital gains may be taxed at different rates than your ordinary income.
  • Short-term vs. long-term gains: In many countries, capital gains are taxed differently depending on how long you held the asset before selling it. Holding an asset for longer than a certain period (usually one year) typically qualifies for lower tax rates.

Here are some additional things to consider:

  • Investment strategies: Some investment strategies aim to maximize capital gains by buying and selling assets frequently.
  • Risk and reward: Capital gains can offer significant potential returns, but they also come with the risk of losses if the asset's value decreases.
  • Diversification: It's important to diversify your portfolio to manage the risk associated with capital gains.