Capital gain

A capital gain is the profit realised when an asset is sold for more than its purchase price. Capital gains apply to a wide range of assets including property, shares, business interests, and collectibles.

Formula

Capital Gain = Sale Price − (Purchase Price + Acquisition Costs + Capital Improvements)

Acquisition costs typically include legal fees, transfer duties, and agent commissions. Capital improvements may include renovations or significant upgrades that enhance the asset’s value.

Example

An investor purchases a property for $500,000 with $25,000 in acquisition costs. After ten years they sell the property for $800,000, paying $20,000 in selling costs. The capital gain is $800,000 − $500,000 − $25,000 − $20,000 = $255,000.

Realised vs unrealised gains

• Unrealised gain — the asset has risen in value but has not been sold; no tax event has occurred
• Realised gain — the asset has been sold and the gain crystallised; this is typically the moment a tax liability arises

Capital gains tax

Most jurisdictions tax capital gains, often at a different rate to ordinary income. Specific rules — such as discounts for assets held longer than a defined period, exemptions for primary residences, and the offsetting of capital losses — vary by country. Always consult a qualified tax adviser before relying on capital gains projections in your investment plan.