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Investing Glossary

Capital Gain

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The term capital gain refers to the increase in the value of a capital asset when it is sold. Put simply, a capital gain occurs when you sell an asset for more than what you originally paid for it. Almost any type of asset you own is a capital asset whether that’s a type of investment (like a stock, bond, or real estate) or something purchased for personal use (like furniture or a boat). Capital gains are realized when you sell an asset by subtracting the original purchase price from the sale price. The Internal Revenue Service (IRS) taxes individuals on capital gains in certain circumstances. A capital gain is the increase in a capital asset’s value and is realized when the asset is sold. Capital gain can be realized or unrealized. The realized gain is the gain from the final sale of an asset or investment. Conversely, an unrealized gain arises when the current price of an asset or investment exceeds its purchase price, but the asset or investment is still unsold. Note that only realized capital gains are taxed, while unrealized (capital) gains are merely paper gains that are usually subject to accounting reporting but do not trigger a taxable event. The gain may be short-term or long-term and must be claimed on income taxes. Short-term capital gains are those realized on assets that you’ve sold after holding them for one year or less. Long-term capital gains are realized on assets that you’ve sold after holding them for more than one year. Unrealized gains and losses reflect an increase or decrease in an investment’s value but are not considered a taxable capital gain. A capital loss is incurred when there is a decrease in the capital asset value compared to an asset’s purchase price.

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