Capital Gain

Investment Dictionary -> Capital Gain

The capital gain represents an increase in the value of capital assets. In general terms, capital assets are held for the sole purpose of generating profits. The investment in assets increases their purchasing price and results in capital gains. On the contrary, the decrease in the value of capital assets results in capital loss.

Capital gains result in relation to tangible and intangible assets. One can generate profits from the sale of real assets, such as buildings and equipment, or non-physical financial assets, such as securities. The sale of intangible assets, for instance goodwill, also results in capital gains. There are two types of gains, short-term and long-term, depending on the time period the asset is held. The short-term investments are held for less than twelve months. If long-term capital assets are held longer than the period of twelve months, their purchase results in a long-term capital gain. The calculation of the period length excludes the acquisition day but includes the disposition day. This logic can be applied to capital losses.

Most countries impose taxes on the capital gains. It is a known that capital investments are one of the keys to economic growth. Capital investment is encouraged by the reduction of tax rates on the capital gains. In the United States, the top tax rate was lowered to 15 percent for individual capital gains. It has to be noted that federal and state taxation are both applicable to capital gains. Many states subject short-term capital investments to state income tax rates. Usually, the rates of taxation differ for individuals and corporations. The Capital Gains Tax is payable by individuals on profits made from the sale of capital assets. Corporations list their capital gains in the shareholders' funds on the statement of financial position.

The rate of taxation is different for the short-term and long-term capital investments. If assets are characterized as short-term capitals, the gain is deemed ordinary and not taxed at discounted capital gain rates. Long-term capital gains are eligible for the capital gain rates. The taxpayer`s bill is reduced if the capital gains are offset by capital losses.

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