Capital gain

The term capital gain is the amount by which the selling price of an asset exceeds the purchase price. It is an increase in the value of a capital asset.

The capital gain of an asset is not realized until that asset is sold. It means that if the asset’s value goes down again, so much so that the end value is lower than the purchase price, then instead of having a capital gain there will be a capital loss.

A capital gain may a short term gain (one year or less) or long term gain (more than one year). Regardless of whether it is short term or long term gain, it is important to declare any capital gains in ones income tax.

In fact, a capital gains tax is imposed on any realized gains. This means that it is only tax when the capital asset is sold or disposed of and the capital gain is realized or not just in paper anymore.

Instances considered to be a disposal of a capital asset include selling the asset, giving the asset away for free, transferring the ownership to someone else, swapping the asset for something else, and getting compensated for the asset (i.e. insurance payout when asset is stolen or destroyed). Although not all disposals of capital assets will result in profit for the initial owner (i.e. giving away the asset as a gift), the changes should still be declared, and in case of any capital gain, the corresponding taxes will be levied by the government.

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