| 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.
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