Capital gains are the profit you earn from selling or disposing of an asset. It can be stocks, bonds, property, or even crypto assets. From individuals to businesses to investments, understanding capital gains is highly important for everyone. Let’s learn what capital gains are and how to calculate capital gains.
Capital gain is the money or the remaining value you get from selling an asset. Everything you own or use in your personal life or business is considered a capital asset.
For example, you bought a stock at $100 and sold it at $150. Hence, your capital gain is $50. Also, you bought a painting for $500 and then sold it for $1000. So, your capital gain is $500.
Capital gains are mainly of two types. They are given below:
Short-term capital gain is the profit from selling any asset that is held for 12 months or less. Examples of short-term capital gains are shares, bonds, mutual funds, etc.
Long-term capital gain is making any profit from selling an investment or asset that has been held for more than 12 months. Examples of long-term capital gains are machinery, real estate property, shares, bonds, etc.
The simple formula for capital gain is the selling price of the asset minus the original price of the asset.
You bought 50 shares at $5 each. Then, sold the 50 shares at $8 each.
Total purchase price of the stock 50*5=$250
Total selling price of the stock=50*8=$400
Capital gain=$400-$250=$150
You bought a factory machine for $1,00,000. Its useful life is 5 years, and the depreciation value is $40,000 for 5 years. Then, sold the machinery for $70,000
Adjusted (Book) Value=$1,00,000-$40,000=$60,000
Capital Gain=$70,000-=$60,000=$10,000
Not all investments are always profitable. Plus, you won’t always earn a profit from selling your asset. Sometimes, you may face losses.
When the selling value of your investment or asset is lower than what you have paid for it, it is called a capital loss.
For instance, you bought a property for $1,00,000 and invested an additional $10,000 to improve the property. But you end up selling the property for $90,000.
Hence, the total value of the property is $1,10,000 ($1,00,000+$10,000). So, the capital loss is $20,000 ($1,10,000-$90,000).
One of the primary benefits of capital losses is reducing tax bills. You will have to pay less in taxable income.
Capital gains tax is the amount of tax you are liable to pay on your capital gain. The tax rate on capital gains varies between short-term and long-term capital gains.
Generally, tax on short-term capital gains is higher than on long-term capital gains. Tax on short-term capital gains ranges from 10% to 37%. In contrast, tax on long-term capital gains ranges from 0% to 20%.
Understanding capital gains helps you make an informed decision whether to invest in an asset or not. Plus, it helps homeowners and investors to enjoy tax advantages. Hopefully, you have learned how to calculate capital gains and capital losses easily.
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