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To define capital gains means understanding the value of our assets from the time of purchase.

Short-term capital gains

Assets sold after being held for one year or less that have gained significant value. Short-term gains are typically taxed as ordinary income based on an individual's tax filing status and adjusted gross income. Note that regulations in different countries vary.

Long-term capital gains

Gains realised on assets that have been held for more than one year and are usually taxed at a lower rate than regular income. Note that regulations in different countries vary.

Capital gain explained: Realised vs Unrealised

Investors make strategic investments for short-term and long-term capital gains. Both must be claimed on annual tax returns.

Realised capital gains occur when an asset is sold, which triggers a taxable event. Unrealised gains reflect an increase or decrease in an investment's value but are not considered a capital gain that should be treated as a taxable event. They are sometimes referred to as paper gains and losses.

In contrast to capital gain, сapital loss reflects a decrease in value compared to its purchase price.

Capital gain examples

To better define capital gains, let’s look at a simple example.

Let’s say that Mr. X bought 100 shares of ABC company on 5 January 2020 at $5 a share. He decided to sell the shares at $10 on 5 January 2022. To make things easier, there were no fees attached to the sale.

The calculation of capital gain is ($10 x 100) – ($5 x 100), giving a total of $500 earned by Mr. X in capital gains.

Capital gain formula