Capital-gains
Channel: English Unpacked
Date: 2024-02-26

The term "capital gains" refers to the profit or increase in value that an individual or business earns from selling an asset, such as stocks, real estate, or valuable possessions. It represents the difference between the purchase price (or "cost basis") of the asset and the price at which it is sold.
To understand capital gains, let's consider an example:
Example 1:
Sarah purchased a piece of land for $100,000 and sold it a few years later for $150,000. The capital gain in this case would be $50,000 ($150,000 - $100,000).
Example 2:
John bought 100 shares of a company's stock at $10 per share, making his initial investment $1,000. If he later sold those shares for $15 each, his capital gain would be $500 ($15 - $10 = $5 per share, and $5 x 100 shares = $500).
It's important to note that capital gains are only realized when an asset is sold. Until then, any changes in the value of the asset are considered "unrealized" or "paper" gains. Additionally, capital gains can be either short-term or long-term, depending on the holding period of the asset.
Short-term capital gains are earned on assets held for one year or less before being sold. They are taxed at the individual's ordinary income tax rate, which is typically higher than the tax rate for long-term capital gains.
Example 3:
Emily purchased a painting for $10,000 and sold it after just six months for $15,000. Since she held the painting for less than a year, the $5,000 capital gain will be treated as a short-term gain and taxed at her ordinary income tax rate.
Long-term capital gains, on the other hand, are earned on assets held for more than one year before being sold. They are taxed at a lower rate, known as the long-term capital gains tax rate, which varies based on the individual's income level.
Example 4:
David bought a vintage car for $50,000 and sold it after three years for $75,000. Since he held the car for more than a year, the $25,000 capital gain will be considered a long-term gain and taxed at the applicable long-term capital gains tax rate.
Understanding capital gains is crucial for individuals and businesses as it helps determine their tax liabilities and financial gains from investments. It is always advisable to consult a tax professional or financial advisor for specific guidance related to capital gains and their tax implications.