What Are Capital Gains?
Capital gains are profits (“gains”) made from the investment of a monetary asset (“capital”). Capital gains are taxed differently than more traditional income (e.g., income derived from wages).
What Constitutes A Capital Gain?
The term “capital gain” contains two legal terms of art, each of which are important to understand. Those terms are “gain” and “capital.”
What Is A Gain?
A “gain” is a net increase in value. Gains are recognized only upon the sale of an asset. This means that even if the value of a stock or bond quadruples over night, it is not recognized as a gain (legally speaking) unless and until it is sold. At the point of sale, the amount of gain is calculated by subtracting the amount for which the asset sold from its basis (most simply, the amount paid for it).
What Is A Capital Asset?
Capital gains are pertinent only to capital assets. Stated most simply, a capital asset is a non-inventory asset. Though the exact details of what constitutes an inventory asset can be complicated, suffice it to consider an inventory asset an item which the seller is in the primary business of selling. For example, a retail jewelry store is in the primary business of selling precious stones and metals. Consequently, a profit from the sale of gold for that jewelry store would (probably) not constitute a capital gain, whereas it may for an individual.
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