Capital Gains: Meaning & Example

An increase in a capital asset's value, realizing a profit when the asset is sold.

Detailed Explanation

A capital gain refers to the profit derived from the sale of a capital asset, such as stocks, bonds, or real estate. It is the difference between the higher selling price and the lower purchase price. Capital gains are not realized—and therefore not taxed—until the asset is actually sold. Most countries tax capital gains differently depending on how long the asset was held before selling (Short-Term vs. Long-Term).

Real-World Example

If you buy 100 shares of Apple at $150 per share ($15,000 total) and sell them three years later at $200 per share ($20,000 total), you have realized a Long-Term Capital Gain of $5,000.

Key Takeaways

•You don't owe capital gains tax until you actually sell the asset (realization).
•Long-Term Capital Gains (holding an asset for over 1 year) are typically taxed at much lower rates than Short-Term Capital Gains.
•Capital losses can often be used to offset capital gains, reducing your tax burden.

Related Terms

Net Worth