Editing Capital gain

{{Short description|Profit from a sale of a capital asset}}
{{Redirect|Capital Gains|the radio show|Capital Gains (radio show)}}
{{Capitalism sidebar}}
'''Capital gain''' is an [[economic concept]] defined as the [[Profit (economics)|profit]] earned on the sale of an [[asset]] which has increased in value over the holding period. An asset may include [[tangible property]], a car, a business, or [[intangible property]] such as [[share capital|shares]].

A capital gain is only possible when the selling price of the asset is greater than the original purchase price. In the event that the purchase price exceeds the sale price, a capital loss occurs. Capital gains are often subject to [[tax]]ation, of which rates and [[Tax exemption|exemptions]] may differ between countries. The history of capital gain originates at the birth of the [[Modern Economics|modern economic]] system{{cn|date=April 2023}} and its evolution has been described as complex and multidimensional by a variety of economic thinkers. The concept of capital gain may be considered comparable with other key economic concepts such as [[Profit (accounting)|profit]] and [[rate of return]]; however, its distinguishing feature is that individuals, not just businesses, can accrue capital gains through everyday [[wikt:acquisition|acquisition]] and disposal of assets.

==History==
[[File:Hoard of ancient gold coins.jpg|thumb|Hoard of ancient gold coins reminiscent of the [[Babylonia]]n currency]]
The history of capital gain in human development includes conceptualizations from pre-1865 [[Slavery in the United States|slave]] capital in the United States, to the development of property rights in France in 1789, and even other developments much earlier.<ref>{{Cite journal|doi = 10.1111/1468-4446.12115|title = Capital in the Twenty-First Century: A multidimensional approach to the history of capital and social classes|year = 2014|last1 = Piketty|first1 = Thomas|journal = The British Journal of Sociology|volume = 65|issue = 4|pages = 736–747|pmid = 25516350| s2cid=14772228 }}</ref> The official beginning of a practical application of capital gain occurred with the development of the [[Babylonia|Babylonian's]] financial system circa 2000 B.C.<ref name=":0">{{Cite journal|doi = 10.2469/faj.v20.n2.95|title = Chapters on the History of Money: Chapter I|year = 1964|last1 = Jenks|first1 = Jeremy C.|journal = Financial Analysts Journal|volume = 20|issue = 2|pages = 95–99}}</ref> This system introduced treasuries where citizens could deposit silver and gold for safekeeping, and also transact with other members of the economy.<ref name=":0" /> As such, this allowed the Babylonians to calculate costs, sale prices and profits, and hence capital gains.

== Calculation ==
Capital gain is generally calculated through taking the sale price of an asset and subtracting its base cost and any incurred expenses.<ref>{{Cite web |title=Calculating and paying capital gains tax |url=https://www.nab.com.au/personal/life-moments/manage-money/money-basics/capital-gains-tax |access-date=2023-08-24 |website=www.nab.com.au |language=en}}</ref> The resulting value will be the capital gain, or capital loss if negative. In reality, many governments provide supplementary methods of calculating capital gains for both individuals and businesses. These methods can provide taxation relief through lowering the calculated capital gain value.

=== Australia ===
The [[Australian Taxation Office]] (ATO) lists three methods of calculating capital gain for Australian citizens and businesses, each one designed to lower the final resulting value of the eligible party's gain.<ref>{{Cite web |last= |first= |title=Calculating your CGT |url=https://www.ato.gov.au/individuals/capital-gains-tax/calculating-your-CGT/?=Redirected_URL |access-date=2023-08-24 |website=www.ato.gov.au |language=en-AU}}</ref> The first is the discount method, whereby eligible individuals or super funds may reduce their stated capital gain value by 50% or 33.33% respectively.<ref>{{Cite web |last= |first= |title=CGT discount |url=https://www.ato.gov.au/Individuals/Capital-gains-tax/CGT-discount/?=Redirected_URL |access-date=2023-08-24 |website=www.ato.gov.au |language=en-AU}}</ref> The second is the indexation method, which allows individuals and firms to apply an index factor to increase the base cost of the asset, thereby decreasing the final capital gain value.<ref>"The Indexation Method Of Calculating Your Capital Gain". 2020. ''Ato.Gov.Au''. https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/Working-out-your-capital-gain/The-indexation-method-of-calculating-your-capital-gain/.</ref> The third is the ‘other’ method, and involves use of the general capital gain formula whereby the base costs of the asset are subtracted from its final sale price.<ref>"The 'Other' Method Of Calculating Your Capital Gain". 2020. ''Ato.Gov.Au''. https://www.ato.gov.au/general/capital-gains-tax/working-out-your-capital-gain-or-loss/working-out-your-capital-gain/the--other--method-of-calculating-your-capital-gain/.</ref>

=== Canada ===
The [[Canada Revenue Agency]] (CRA) includes several unique guidelines for calculating individual or business capital gain. The CRA states that individuals may exclude from their capital gains calculation the following types of donations: “shares in the capital stock of a mutual fund corporation… prescribed debt obligations that are not linked notes, ecologically sensitive land… (or) a share, debt obligation, or right listed on a designated stock exchange”.<ref name=":2">{{Cite web |last= |first= |date=22 June 2017 |title=Capital Gains – 2022 |url=https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4037/capital-gains.html |access-date=24 August 2023 |website=www.canada.ca}}</ref> Note that for the exclusion to be approved the donation must be to a qualified donee, and also that capital losses arising from such donations are not eligible to be excluded from an individual's reporting.<ref name=":2" /> The CRA states that following a capital gain, individuals may be able to either claim a reserve or claim a capital gains deduction.<ref name=":2" /> Individuals are eligible to claim a reserve when the capital gain does not occur as one lump-sum payment but rather a series of payments over time.<ref name=":2" /> In order to calculate the reserve, Canadian individuals must calculate their capital gain via the regular sale price minus cost price method, and subsequently subtract the amount of approved reserve for the year.<ref name=":2" /> A capital gains deduction is the second form of capital gain calculation which the CRA offers. It is “a deduction that you can claim against taxable capital gains you realized from the disposition of certain capital properties”.<ref name=":2" /> Only residents from Canada throughout the previous year are eligible to claim the deduction, and only certain capital gains are eligible for the deduction to be applied.<ref name=":2" />

=== Germany ===
The German tax office levies different capital gains tax based on the asset you sold and the holding period. Taxpayers in Germany, pay a flat 25% (2024) capital gains tax on their profits from selling the stocks plus solidarity surcharge of 5.5% (2024).<ref name=":1">{{Cite web |last=GermanPedia |date=2024-02-04 |title=Capital Gains Tax in Germany [Ultimate 2024 English Guide] |url=https://germanpedia.com/capital-gains-tax-germany/ |access-date=2024-04-30 |website=GermanPedia |language=en-US}}</ref> If the individual is a church member, they also pay church tax.<ref name=":1" /> In the end the total capital gains tax is 27.82% in Baden-Württemberg and Bavaria, and 27.99% in all other federal states.<ref>{{Cite web |date=2013-11-04 |title=Abgeltungssteuer auf Kapitalerträge wie Aktien oder Fonds |url=https://www.finanztip.de/abgeltungsteuer/ |access-date=2024-04-30 |website=www.finanztip.de |language=de-DE}}</ref> Taxes on the sale of real estate are completely different from that of stocks. If you hold the property for more than ten years, you can sell it tax-free in Germany. Similarly, you can sell the property tax-free if you lived in it yourself for at least two years. However, you pay taxes based on your personal tax rate if you don't meet any of the tax-free criteria.<ref name=":1" />

===Pakistan===
In Pakistan, capital gains are computed by subtracting the asset’s adjusted cost (including any allowable improvement expenses) from its disposal proceeds under the Income Tax Ordinance, 2001.<ref>{{Cite web |title=Computation of capital gains |url=https://download1.fbr.gov.pk/Docs/2011919119751748img031.pdf |access-date=2025-02-24 |website=FBR |language=en}}</ref> The tax rate applied depends on the type of asset, its acquisition date, and the holding period. For example, listed securities acquired on or after 1 July 2024<ref>{{Cite web |title=FBR removes holding period for property capital gains tax|url=https://profit.pakistantoday.com.pk/2024/07/31/fbr-removes-holding-period-for-property-capital-gains-tax/ |access-date=2025-02-24 |website=Profit |language=en}}</ref> are generally subject to a flat 15% tax.<ref>{{Cite web |title=Individual - Income determination|url=https://taxsummaries.pwc.com/pakistan/individual/income-determination |access-date=2025-02-24 |website=PWC |language=en}}</ref> While prior to that, shorter holding periods attracting higher rates and longer holdings sometimes qualifying for reduced rates or exemptions.<ref>{{Cite web |title=AMENDMENTS IN THE INCOME TAX ORDINANCE, 2001 VIDE FINANCE ACT 2024
|url=https://dps.psx.com.pk/download/attachment/234236-1.pdf |access-date=2025-02-24 |website=PSX |language=en}}</ref> Likewise, gains on immovable property are taxed on a sliding scale—short-term gains incur higher rates, while those from assets held over a longer period benefit from progressively lower rates or full exemptions.<ref>{{Cite web |title=Corporate - Income determination |url=https://taxsummaries.pwc.com/pakistan/corporate/income-determination |access-date=2025-02-24 |website=PWC |language=en}}</ref>

=== United Kingdom ===
The [[HM Revenue and Customs|United Kingdom HM Revenue and Customs]] (HMRC) office lists certain assets which are eligible to be considered as capital gains. These include “most personal possessions worth  £6,000 or more, apart from your car”, property that is not considered your primary dwelling, your main dwelling if it exceeds a certain size or has been used for business, any shares that are not in an individual savings account or personal equity plan, and any business assets.<ref name=":3">{{Cite web |title=Capital Gains Tax: what you pay it on, rates and allowances |url=https://www.gov.uk/capital-gains-tax/what-you-pay-it-on |access-date=2023-08-24 |website=GOV.UK |language=en}}</ref> HMRC also lists certain assets which are exempt from accruing capital gains, including any gains made from individual savings accounts or personal equity plans, “UK government gilts and Premium Bonds”, and any winnings from lottery, betting or pools.<ref name=":3" /> HMRC states that only gains made above an individual's allowance are eligible to be taxed, and no tax is payable for individuals who accrue gains which are under their Capital Gains Tax allowance.<ref name=":3" /> In order to calculate an individual's capital gain, HMRC requires calculation of the gains for each asset in the relevant 12-month period, which are then summed together and finally reduced by the amount of allowable losses deduction.<ref name=":4">{{Cite web |title=Capital Gains Tax: what you pay it on, rates and allowances |url=https://www.gov.uk/capital-gains-tax/work-out-need-to-pay |access-date=2023-08-24 |website=GOV.UK |language=en}}</ref> HMRC also states that when reporting a loss, “the amount is deducted from the gains you made in the same tax year”.<ref name=":3" />

=== United States ===
The [[Internal Revenue Service|United States Internal Revenue Service]] (IRS) also provides guidelines on calculating capital gains. The IRS defines a capital gain or loss as “the difference between the adjusted basis in the asset and the amount you realized from the sale”.<ref name=":11">{{Cite web |title=Topic No. 409, Capital Gains and Losses {{!}} Internal Revenue Service |url=https://www.irs.gov/taxtopics/tc409 |access-date=2023-08-24 |website=www.irs.gov |language=en}}</ref> Capital gains are also further defined as either short term or long term. Short term capital gains occur when you hold the base asset for less than one year, while long term capital gains occur when the asset is held for over one year.<ref name=":11" /> Ownership dates are to be counted from the day after the date which the asset was acquired, through to the day which the asset is sold.<ref name=":11" />

== Taxation of gains ==
{{main article|Capital gains tax}}
There are typically significant differences in the taxation of capital gains earned by individuals and corporations, and the [[OECD]] recognizes three simple categories of individual capital income which are taxed by its member nations around the world. These include [[Dividend|dividend income]], [[Interest|interest income]], and capital gains realized through property and [[Share (finance)|shares]].<ref name=":5">Harding, Michelle. 2013. "Taxation Of Dividend, Interest, And Capital Gain Income". OECD Taxation Working Papers No. 19. OECD Publishing.</ref> The OECD average dividend tax rate is 41.8%, whereby dividends are often taxed at both the corporate and individual level and categorized as [[Corporate Income Tax|corporate income]] first and [[personal income]] second.<ref name=":5" /> However, certain countries such as Australia, Chile, Mexico, and New Zealand employ imputation tax systems which allow [[corporation]]s to redeem imputation credits for tax paid at the corporate level, thus reducing their tax burden.<ref name=":5" /> The OECD average interest income tax rate is 27%, and almost all OECD countries excluding Chile, Estonia, Israel, and Mexico tax an individual's total nominal interest income.<ref name=":5" />

== Eligible assets ==
Capital gain can only be earned on the profitable sale of assets. A former Chief Accountant of the [[U.S. Securities and Exchange Commission|Securities Exchange Commission]] defined an asset as: “[[Cash]], contractual claims to cash or services, and items that can be sold separately for cash”.<ref>Schuetze, Walter. 1993. "What Is An Asset?". ''Accounting Horizons'' 7 (3): 69.</ref> Practical applications of this definition primarily include stocks and real estate.
[[File:Money-2180330 1920.jpg|thumb|A visual representation of capital gain with coins, as the essential nature of capital gain is accrual of [[Financial capital|capital]]]]

=== Stocks ===
A capital gain may be earned through the sale of financial assets such as [[Share capital|stocks]]. When one sells a stock, they would subtract the cost price from the sale price to calculate their capital gain or loss.

==== Disposition effect ====
The [[disposition effect]] is a theory which links [[human psychology]] to capital gain in stocks and examines how humans make choices under the threat of a potential capital loss.<ref>{{Cite journal|doi=10.1111/j.1540-6261.1985.tb05002.x|title=The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence|year=1985|last1=Shefrin|first1=Hersh|last2=Statman|first2=Meir|journal=The Journal of Finance|volume=40|issue=3|pages=777–790}}</ref> It reveals a pattern of [[irrationality]] within human behaviour, in which stocks which have potential to accrue a capital gain are sold too early, while stocks which are clear losers are held on for too long, thus creating greater capital losses than necessary.<ref>{{Cite journal|doi = 10.1016/j.jbankfin.2012.12.007|title = The disposition effect and investor experience|year = 2013|last1 = Da Costa|first1 = Newton|last2 = Goulart|first2 = Marco|last3 = Cupertino|first3 = Cesar|last4 = MacEdo|first4 = Jurandir|last5 = Da Silva|first5 = Sergio|journal = Journal of Banking & Finance|volume = 37|issue = 5|pages = 1669–1675|url = https://mpra.ub.uni-muenchen.de/43570/1/MPRA_paper_43570.pdf}}</ref>

==== Expected capital gain asset pricing model ====
This asset pricing model details how the expectations of future capital gains in the [[stock market]] are a key driver of actual stock price movements.<ref name=":6">{{Cite journal|doi = 10.1257/aer.20140205|title = Stock Price Booms and Expected Capital Gains|year = 2017|last1 = Adam|first1 = Klaus|last2 = Marcet|first2 = Albert|last3 = Beutel|first3 = Johannes|journal = American Economic Review|volume = 107|issue = 8|pages = 2352–2408|doi-access = free|hdl = 2072/253881|hdl-access = free}}</ref> In general, “asset price boom and bust cycles… are fueled by the belief-updating dynamics of [[investor]]s”, and thereby the optimism regarding future capital gains in a particular stock will often be the cause of the eventual increase in the stock's price.<ref name=":6" />

==== Lock-in effect ====
The lock-in effect proposes that rather than realize capital gains on stocks, investors should instead revert to [[Short (finance)|short-selling]] substitute securities.<ref name=":7">{{Cite journal|doi = 10.2307/1912150|jstor = 1912150|title = Capital Market Equilibrium with Personal Tax|last1 = Constantinides|first1 = George M.|journal = Econometrica|year = 1983|volume = 51|issue = 3|pages = 611–636}}</ref> Provided that “tax-exempt perfect substitute [[Security (finance)|securities]] exist”, investors should never realize their capital gains on stocks because it is possible to reduce the risk from a large position in a stock by “costlessly short selling a perfect substitute”.<ref name=":7" />

=== Real estate ===
A capital gain may be earned through the sale of physical assets such as houses, apartments or land. In most countries however, the sale of a primary dwelling or [[Primary residence]] is exempt from capital gains tax. For example, the Australian Taxation Office offers a full exemption of capital gains tax on the sale of a primary home, provided the individual or couple meets certain eligibility criteria.<ref>{{Cite web |last= |first= |title=Your main residence - home |url=https://www.ato.gov.au/Individuals/Capital-gains-tax/Property-and-capital-gains-tax/Your-main-residence---home/?=Redirected_URL |access-date=2023-08-24 |website=www.ato.gov.au |language=en-AU}}</ref>

==== Efficiency in the real estate markets ====
The interlink between psychology and capital gain is also frequently seen in stocks, a concept which is similarly explored by Dusansky & Koç. Since houses are not only consumption but often investment expenditures for families, expectations of capital gains through investing in the house as an asset rather than a consumption good has a strong influence on actual housing prices and demand.<ref name=":9">{{Cite journal|doi=10.1016/j.jue.2006.07.008|title=The capital gains effect in the demand for housing|year=2007|last1=Dusansky|first1=Richard|last2=Koç|first2=Çaḡatay|journal=Journal of Urban Economics|volume=61|issue=2|pages=287–298}}</ref> As stated by Dusansky & Koç, “an increase in housing prices increases the demand for owner-occupied housing services.<ref name=":9" /> Thus, housing’s role as investment asset with its potential for capital gains dominates its role as consumption good”.<ref name=":9" />

=== Bonds ===
A capital gain may be earned through the sale of intangible financial assets such as [[Bond (finance)|bonds]]. The capital gain would be achieved when the selling price of the bond is higher than the cost price, and the capital loss would occur if the selling price of the bond is lower than the cost price.

==== Exemptions ====
Some government departments, such as the Australian Taxation Office (ATO) do not classify gains arising from the profitable sale of a bond as a capital gain.<ref name=":10">{{Cite web |last= |first= |title=You and your shares 2020 |url=https://www.ato.gov.au/Forms/You-and-your-shares-2020/?page=24 |access-date=2023-08-24 |website=www.ato.gov.au |language=en-AU}}</ref> If an individual redeems a bond for more than, or less than, the price they paid for the bond, the ATO states that this profit is “not treated as a capital gain” and that the profit should simply be included in the individual's tax return.<ref name=":10" /> Similarly, if an individual sells a bond to another individual for more than, or less than, the price they paid for the bond, the ATO states that “this profit is not treated as a capital gain” and that the profit should simply be included in the individual's tax return.<ref name=":10" /> However, the United States Internal Revenue Service (IRS) does consider profits from the redemption or sale of a bond as a capital gain.<ref name=":11"/> Bond capital gains are calculated in the same method as other capital gains, whereby “the difference between the adjusted basis in the asset and the amount you realized from the sale is a capital gain or a capital loss”.<ref name=":11" /> In Pakistan, assets held for personally use, except from jewelry, artwork, and collectibles, are exempt while calculating capital gains.{{cn|date=March 2025}}

==See also==
* [[Cash flow]]
* [[Investment]]
* [[Passive income]]
* [[Property income]]
* [[Profit (economics)|Profit]]
* [[Share repurchase]]
* [[Unearned income]]

==References==
{{Reflist}}

==Further reading==
*{{cite journal |last=Black |first=Stephen |year=2011 |title= A Capital Gains Anomaly: Commissioner v. Banks and the Proceeds from Lawsuits |ssrn=1858776 |journal=St. Mary's Law Journal |volume=43 |pages=113 }}

[[Category:Accounting terminology]]
[[Category:Capital gains taxes]]
[[Category:Corporate finance]]
[[Category:Fundamental analysis]]
[[Category:Profit]]
[[Category:Technical analysis]]
[[Category:Tax terms]]