Capital gains are calculated by subtracting the purchase price from the sale price. In the case of an asset that has been held for a long time, it would not be appropriate to calculate gains merely by reducing the purchase price from the sale price without taking inflation into account. As a result, the concept of indexing the purchase price has been introduced. By doing so, it is possible to calculate gains by reducing indexed purchase price from sale price. In other words, indexation only applies to long-term assets.