Definition
A Capital Gain is the profit earned from the sale or disposal of an asset. It is calculated by subtracting the asset’s purchase cost from the amount received upon its sale. Capital gains are subject to various tax laws, which can provide exemptions, deductions, and reliefs to reduce the taxable amount. For companies, capital gains are adjusted through indexation and are subject to corporation tax.
Examples
- Stock Sale: If an individual buys shares for $5,000 and sells them for $8,000, the capital gain is $3,000.
- Real Estate: If a business buys a commercial property for $200,000 and sells it for $350,000, the capital gain is $150,000.
- Business Equipment: If a company purchases machinery for $50,000 and sells it after five years for $30,000, there is no capital gain (and, in this instance, a capital loss of $20,000).
Frequently Asked Questions
Q: What is the difference between short-term and long-term capital gain? A: Short-term capital gains are realized from assets held for one year or less and are typically taxed at a higher rate. Long-term capital gains come from assets held for more than one year and usually benefit from lower tax rates.
Q: How does indexation affect capital gains for companies? A: Indexation adjusts the cost base of an asset for inflation, which can reduce the amount of gain subject to tax, thereby potentially lowering the corporation tax liability.
Q: What types of exemptions are available for capital gains? A: Exemptions can vary greatly but may include specific allowances for primary residences, retirement plans, small business stock, and certain personal-use items. Each jurisdiction’s tax laws dictate these exemptions.
Q: Can capital losses offset capital gains? A: Yes, capital losses can be used to offset capital gains, reducing the overall taxable amount. Excess losses can sometimes be carried over to future tax years.
Q: Are individuals and companies subject to the same capital gains tax rates? A: Typically, individuals and companies are subject to different tax rates and regulations regarding capital gains. Companies often face additional considerations like indexation and different rates depending on the asset type.
Related Terms with Definitions
- Capital Gains Tax: A tax on the profit realized from the sale of non-inventory assets, such as stocks, bonds, property, and equipment.
- Chargeable Gain: The amount of gain that remains after applying all allowable exemptions, deductions, and reliefs, which is then subject to capital gains tax.
- Indexation: An adjustment of the cost base of an asset to account for inflation, reducing the effective gain and thereby the tax liability.
- Corporation Tax: A tax imposed on the profits of a corporation, which can include capital gains as adjusted by indexation.
Online References
Suggested Books for Further Studies
- “The Bogleheads’ Guide to Investing” by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf
- “Capital Gains, Minimal Taxes: The Essential Guide for Investors and Traders” by Kaye A. Thomas
- “Tax-Free Wealth: How to Build Massive Wealth by Permanently Lowering Your Taxes” by Tom Wheelwright
Accounting Basics: “Capital Gain” Fundamentals Quiz
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