Definition of Capital gain

Capital gain is the increase in the value of investment or real estate (capital assets) that gives higher worth as compared to purchased price.

This gain can be utilized only when the asset is sold. It may be long term or short term and taxes are applicable on the gain realized on the investment.

Explanation

Usually, lower tax rate is applicable on long term capital gain as compared to regular income. It is for the encouragement of entrepreneurship and investment in the economy.

It is often used in order to mean realized gain. Some of the investments based on capital gain are options, mutual funds, collectibles, bonds, stock and real estate.

For example, if an investor buys 100 shares for $20 per share and sells it for $30. The investor realizes the capital gain of $10 per share. Taxes are reported for capital gains using the IRS schedule D, and these taxes are subject to different rates of taxes, depending on the short or long term maturity of the investment.