What are Capital Gains?

Published by Thomas Herold in Investments, Laws & Regulations

'Capital Gains' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Capital gains refer to profits that arise when you sell a capital asset like real estate, stocks, and bonds. These proceeds must be above the purchase price to qualify as capital gains. A capital gain is also the resulting difference between a low buying price and a high selling price that leads to a financial gain for investors. The opposite of capital gains are capital losses, which result from selling such a capital asset at a price lower than for what you purchased it. Capital gains can pertain to investment income that is associated with tangible assets like financial investments of bonds and stocks and real estate. They may also result from the sale of intangible assets that include goodwill.

Capital gains are also one of the two principal types of investor income. The other is passive income. With capital gains’ forms of income, large, one time amounts are realized on an asset or investment. There is no chance for the income to be continuous or periodic, as with passive income. In order to realize another capital gain, another asset must be purchased and acquired. As its value rises, it can also be sold to lock in another capital gain. Capital gain investments are generally larger amounts, though they only pay one time.

Capital gains have to be reported to the Internal Revenue Service, whether they belong to a business or an individual. These capital gains have to be designated as either short term gains or long term gains. This is decided by how long you hold the asset before choosing to sell it. When an asset with a gain is held longer than a year, the capital gain is long term. If it is held for a year or less time frame, such a capital gain proves to be short term.

When an individual or business’ long term capital gains are greater than long term capital losses, net capital gains exist. This is true to the point that these gains are greater than net short term capital losses. Tax rates on these capital gains are lower than on other forms of income. Up to 2010’s conclusion, the highest capital gains tax rates for the majority of investors proves to be fifteen percent. Those whose incomes are lower are taxed at a zero percent rate on their net capital gains.

When capital gains are negative, or are actually capital losses, the losses may be deducted form your tax return. This reduces other forms of income by as much as the yearly limit of $3,000. Additional capital losses can be carried over to future years when they exceed $3,000 in any given year, reducing income for tax purposes in the future. These capital gains and losses should be reported on the IRS’ Schedule D for capital gains and losses.

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The term 'Capital Gains' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.