Investor Facts: What Is A Capital Gain?

A capital gain is a profit realized from the sale of an investment.

Stock, bonds and other investments purchased at given price may be later sold at a higher price. The difference in the price results in a profit, or gain, for the investor. If the price is lower, it’s a capital loss.

A capital gain is money you earned from selling an asset, after subtracting the investment’s initial cost. Capital gains (or losses) on investments are classified as long term or short term.

If you hold an asset for more than one year your capital gain (or loss) is long term. If you held it for less than one year it is short term.

To determine this, count from the day after the day you acquired the asset up to and including the day you sold it.

Capital gain as a term is used predominantly in the context of income taxes. If you end up with a capital gain, a lower tax rate may apply.

Net short-term capital gains are taxed at ordinary income tax rates. You simply add these gains to your other income.

Reducing taxes

If your capital losses exceed your capital gains, the amount of excess loss you can claim is limited but can be carried forward to future tax years.

Besides lowering your tax bill, you can accomplish other personal financial goals by managing the distinction between a capital gain and other income.

For instance, you can offset a capital gain with a capital loss. If you want to get out of an investment position or need cash you can sell something that made money and offset that gain with something that lost money, reducing your taxable income.

In addition, you can transfer capital assets in kind to your heirs to avoid estate and gift taxes.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.