A capital gain is the profit made when a capital asset, such as a share, bond, fund unit, property or cryptocurrency, is sold or otherwise disposed of for more than its cost. The gain is the difference between the sale proceeds and the asset's cost basis, the original price plus purchase costs and certain adjustments. A sale for less than cost produces a capital loss instead.
Capital gains are distinct from income such as wages, interest or dividends, and many tax systems treat them separately. Until a sale, a rise in value is only appreciation, an unrealized gain; the sale "realizes" it. In the United States the tax rate depends on how long the asset was held, splitting gains into the short-term capital gain and long-term capital gain categories.
Capital gain in plain terms
Suppose you buy a second-hand bicycle for 200, fix it up a little and later sell it for 300. The extra 100 you walk away with, after allowing for what you paid and spent, is your gain. Nobody paid you a wage for it; the bicycle simply became worth more than you paid.
A capital gain is the same thing for investments and property. It only counts once you actually sell. While you still own the item, any rise in value is just a number on paper, and it can shrink again if prices fall before you sell.
How a capital gain is calculated
The basic calculation is:
- Net proceeds are the sale price less selling costs such as commissions.
- Adjusted cost basis is the purchase price plus buying costs, adjusted for events such as stock splits, reinvested distributions or, for property, capital improvements and depreciation.
An investor buys 100 shares at $20 each, paying $2,000 plus a $10 commission, so the basis is $2,010. Later the shares are sold at $30 each for $3,000, less a $10 commission, giving net proceeds of $2,990. The capital gain is , or $980. If the shares had paid dividends during the holding period, those would be taxed separately as income and would form part of the total return, not the capital gain.
When shares of the same company are bought at different times, the basis of the shares sold depends on the matching method. US investors may use specific identification, first-in-first-out, or average cost for fund shares; the UK applies fixed share-matching rules.
Sources of capital gains
- Securities. Selling stock, bonds or fund shares above basis, including gains passed through by funds as a capital gains distribution.
- Property. Selling land or buildings, including a second home or buy-to-let; a main home often gets special relief.
- Business assets. Selling a business, a stake in one, or assets such as equipment or goodwill.
- Digital assets. The IRS treats cryptocurrency as property (Notice 2014-21), so selling it, swapping it for another token or spending it can trigger a capital gain.
- Collectibles. Art, antiques, coins and precious metals, often taxed at different rates.
Taxation of capital gains
Countries treat capital gains in very different ways, and an investor's tax residency usually decides which rules apply. Many tax them at lower rates than ordinary income or exempt part of the gain; a few, including Singapore, have no general capital gains tax; others tax them as ordinary income. Cross-border investors may face double taxation, which tax treaties try to resolve.
In the United States, gains are reported on Form 8949 and Schedule D, and brokers report sales and, for most securities, cost basis on Form 1099-B. Assets held more than one year qualify for long-term rates of 0%, 15% or 20%; gains on assets held one year or less are taxed at ordinary income rates. Higher-income taxpayers may also owe the 3.8% net investment income tax. Notable US rules include the exclusion of up to $250,000 of gain ($500,000 for married couples filing jointly) on the sale of a main home that meets ownership and use tests, and the "step-up" in basis for inherited assets, which removes gains that built up during the deceased owner's lifetime. Gains inside tax-advantaged accounts such as an individual retirement account (IRA) are not taxed when realized.
In the United Kingdom, capital gains tax applies to gains above an annual exempt amount (£3,000 for 2026–27), at 18% or 24% for individuals depending on their income.
Criticism and policy debate
Lower rates on capital gains are defended on the grounds that they encourage investment, reduce the "lock-in" effect that discourages selling, partly offset the effect of inflation on nominal gains, and soften double taxation of company profits. Critics argue that the benefit flows mainly to wealthy households, whose income comes disproportionately from capital, and that the gap with income tax rates invites tax avoidance by recharacterizing income as gains, as in the long-running dispute over carried interest earned by private equity managers. Taxing only realized gains also lets owners defer tax indefinitely by never selling.