Question

What is a capital gain?

Short answer

A capital gain is the profit made from the sale of an asset, such as stocks, real estate, or other investments, when the selling price is higher than the initial purchase price. For example, if you purchased 100 shares of a company's stock for \(10 per share and later sold them for \(15 per share, your capital gain would be \(500, calculated as: \( Capital Gain = (Total Selling Price - Initial Purchase Price) = (\)1,500 - \(1,000).

Step-by-step solution

Definition of Capital Gain

A capital gain is the profit made from the sale of an asset, such as stocks, real estate, or other investments, when the selling price is higher than the initial purchase price. In other words, a capital gain occurs when you sell an asset for more than you initially paid for it.

An Example of Capital Gain

Let's consider a simple example to further explain the concept of capital gain. Suppose you purchased 100 shares of a company's stock for \(10 per share, which means you paid a total of \)1,000 (100 shares * \(10 per share). After one year, the stock price increases to \)15 per share, and you decide to sell all your shares. To calculate the total selling price, you would multiply the number of shares (100) by the current price per share (\(15), resulting in \)1,500 (100 shares * $15 per share). Now, to find the capital gain, subtract the initial purchase price from the total selling price: \[ Capital Gain = Total Selling Price - Initial Purchase Price \] In our example: \( Capital Gain = \(1,500 - \)1,000 = $500 \) So, the capital gain in this case is \(500, which means you made a profit of \)500 from the sale of the stocks.