Capital Gain
What is Capital Gain?
A capital gain is the profit from selling an asset for more than you paid for it.
It is realized only when the asset is sold; until then it is an unrealized (paper) gain. Many governments tax capital gains, often at a different rate than ordinary income, and lower rates for assets held longer.
Capital Gain: a worked example
Priya buys 120 shares at $25 and pays a $20 commission, so her cost basis is (120 × $25) + $20 = $3,020. Two years later she sells at $41, receiving 120 × $41 = $4,920 and paying another $20 commission, for net proceeds of $4,900. Her realized gain is $4,900 minus $3,020 = $1,880. If her country taxes long held assets at 12%, the bill is 0.12 × $1,880 = $225.60 and she keeps $1,654.40 of the gain. Had she sold at $23 instead, net proceeds of $2,740 against a $3,020 basis would book a $280 capital loss, which most systems let her subtract from other gains.
The mistake students make with capital gain
Many people assume a rising portfolio balance creates a tax bill. In most systems nothing is owed until the asset is sold: Priya's shares could climb from $25 to $41 over several years while her taxable gain stays at zero, and the whole $1,880 lands in the year she sells. Brokerage apps encourage the error by showing an unrealized gain in green next to the balance, where it reads like income. The other half of the error is taxing the sale price rather than the sale price minus basis.
Capital Gain questions
Do you pay tax on stocks you have not sold?
Capital gains tax generally applies only when you sell, not while the position rises. A holding that doubles produces an unrealized or paper gain, which most tax systems ignore until a sale turns it into a realized gain. That timing gives investors a real choice about when the bill arrives, which is why some hold an asset past a holding period threshold or offset a sale against a loss elsewhere in the portfolio.
How do you calculate cost basis?
Cost basis is what you paid for an asset plus the costs of acquiring it, such as commissions and fees. Buying 120 shares at $25 with a $20 commission gives a basis of $3,020, or about $25.17 a share. Where dividends are taxed as they are paid, reinvested dividends add to basis, and a two for one split spreads the same basis across twice as many shares, so 240 shares would carry about $12.58 each.
What is the difference between a capital gain and a dividend?
A capital gain comes from selling an asset for more than its basis, while a dividend is cash a company pays you for holding its shares. You control the timing of a gain because you choose when to sell; you do not control when a board declares a dividend. Many tax codes also apply different rates to the two, so the mix between them changes an investor's after tax return.
Formula / Example
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