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What are Capital Gains?

By Garry Crystal
Updated May 16, 2024
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Capital gains are profit that results from the appreciation of a capital asset. The gain comes from the asset appreciating in value from its purchase price. If the item depreciates in value since its purchase, then it is called a capital loss. Capital gains can occur in assets such as property or goods, as well as in financial assets such as stocks or bonds.

Nearly everything you use and own is a capital asset and can be subject to tax. Anything you sell for more than the actual purchase price, resulting in capital gains, can be taxable. A capital loss is not tax deductible.

Capital gain tax is variable depending on the length of time you have held the asset. If the asset has appreciated and is sold within a year of purchase, then the tax rate is the same as that for ordinary income, which can rise to 35% in the progressive tax system. This is considered short-term capital gains. If the appreciated asset is sold after a year of purchase, the profit is considered long-term capital gains. The asset will be taxed at a maximum rate of 15%.

Capital gains are either realized or unrealized. Unrealized assets are known to have appreciated in value, but have not yet been sold. The capital gain is a potential value. A realized capital gain occurs when an asset has appreciated in value and been sold.

Although capital gains are subject to tax, there is also a way to counteract any capital losses you have incurred during the year. This is called capital loss offset. You can offset your capital gain with your capital loss tax to reduce your taxes. If the losses are more than the gains, then you can deduct up to 3,000 US dollars (USD) to offset ordinary income.

Many countries have their own rules regarding taxation on capital gains. Some countries allow you to earn a certain amount of income from your capital gain until you are subject to the tax. In America, an individual can exclude 250,000 USD on gains of the sale of property, if the property was a primary residence for two to five years before the sale. The two years of residence do not have to continuous, and the exception is for 500,000 USD if a couple owned the property. There are many rules and exceptions that are clarified at the Internal Revenue Service website.

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Discussion Comments
By anon475 — On Apr 25, 2007

What is the calculation dates considered for capital gains. I have an agreement of purchase from April 2005 with a possession date of Sept 05 however it has not completed and probably won't until June 07. Can I sell and avoid capital gains as the intent was to have lived in here the last 2 years or will it be calculated on the actual possession date. I did sell my house and had to vacate Aug 05 to take possession of the new puchase which still has not happened.

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