thumb|A visual representation of capital gain with coins, as the essential nature of capital gain is accrual of [[Financial capital|capital]]
Capital gain is an economic concept defined as the profit earned on the sale of an asset that has increased in value over the holding period. An asset may be tangible property, a car, a business, or intangible property such as shares.
A capital gain is when the selling price of the asset is greater than the original purchase price. In the event that the purchase price exceeds the sale price, a capital loss occurs. Capital gains are often subject to taxation, of which rates and exemptions differ between countries. The history of capital gain originates at the birth of the modern economic system and its evolution has been described as complex and multidimensional by a variety of economic thinkers. The concept of capital gain may be considered comparable with other key economic concepts such as profit and rate of return, however, its distinguishing feature is that individuals, not just businesses, can accrue capital gains through everyday acquisition and disposal of assets.
History
thumb|Hoard of ancient gold coins reminiscent of the [[Babylonian currency]]
The history of capital gain in human development includes conceptualizations from pre-1865 slave capital in the United States, to the development of property rights in France in 1789, and even other developments much earlier. The official beginning of a practical application of capital gain occurred with the development of the Babylonian's financial system circa 2000 B.C. This system introduced treasuries where citizens could deposit silver and gold for safekeeping, and also transact with other members of the economy. The resulting value is the capital gain, or a capital loss if the result is negative. In practice, many jurisdictions provide supplementary methods for calculation; for instance, the Australian tax system allows eligible taxpayers to choose between the "discount method," the "indexation method," or the "other method" to achieve the most favorable tax outcome.
Australia
The Australian Taxation Office (ATO) lists three methods of calculating capital gain for Australian citizens and businesses, each one designed to lower the final resulting value of the eligible party's gain. The first is the discount method, whereby eligible individuals or super funds may reduce their stated capital gain value by 50% or 33.33% respectively. The second is the indexation method, which allows individuals and firms to apply an index factor to increase the base cost of the asset, thereby decreasing the final capital gain value. The third is the ‘other’ method, and involves use of the general capital gain formula whereby the base costs of the asset are subtracted from its final sale price.
Canada
The Canada Revenue Agency (CRA) includes several unique guidelines for calculating individual or business capital gain. The CRA states that individuals may exclude from their capital gains calculation the following types of donations: “shares in the capital stock of a mutual fund corporation… prescribed debt obligations that are not linked notes, ecologically sensitive land… (or) a share, debt obligation, or right listed on a designated stock exchange”. Note that for the exclusion to be approved the donation must be to a qualified donee, and also that capital losses arising from such donations are not eligible to be excluded from an individual's reporting. If the individual is a church member, church tax is also applied, resulting in a total effective tax rate of 27.82% in Baden-Württemberg and Bavaria, and 27.99% in all other federal states.
Taxes on the sale of real estate differ significantly: gains from private sales are generally tax-free if the property was held for more than ten years. Furthermore, a property can be sold tax-free regardless of the holding period if it was used exclusively for personal residential purposes between acquisition and sale, or in the year of sale and the two preceding years. The tax rate applied depends on the type of asset, its acquisition date, and the holding period. For example, listed securities acquired on or after 1 July 2024 are generally subject to a flat 15% tax. While prior to that, shorter holding periods attracting higher rates and longer holdings sometimes qualifying for reduced rates or exemptions. Likewise, gains on immovable property are taxed on a sliding scale—short-term gains incur higher rates, while those from assets held over a longer period benefit from progressively lower rates or full exemptions.
United Kingdom
The United Kingdom HM Revenue and Customs (HMRC) office lists certain assets which are eligible to be considered as capital gains. These include “most personal possessions worth £6,000 or more, apart from your car”, property that is not considered your primary dwelling, your main dwelling if it exceeds a certain size or has been used for business, any shares that are not in an individual savings account or personal equity plan, and any business assets. HMRC also lists certain assets which are exempt from accruing capital gains, including any gains made from individual savings accounts or personal equity plans, “UK government gilts and Premium Bonds”, and any winnings from lottery, betting or pools. HMRC also states that when reporting a loss, “the amount is deducted from the gains you made in the same tax year”. Capital gains are also further defined as either short term or long term. Short term capital gains occur when you hold the base asset for less than one year, while long term capital gains occur when the asset is held for over one year. The OECD average dividend tax rate is 41.8%, whereby dividends are often taxed at both the corporate and individual level and categorized as corporate income first and personal income second. Practical applications of this definition primarily include stocks and real estate.
Stocks
A capital gain may be earned through the sale of financial assets such as stocks. When one sells a stock, they would subtract the cost price from the sale price to calculate their capital gain or loss.
Disposition effect
The disposition effect is a theory which links human psychology to capital gain in stocks and examines how humans make choices under the threat of a potential capital loss. It reveals a pattern of irrationality within human behaviour, in which stocks which have potential to accrue a capital gain are sold too early, while stocks which are clear losers are held on for too long, thus creating greater capital losses than necessary.
Expected capital gain asset pricing model
This asset pricing model details how the expectations of future capital gains in the stock market are a key driver of actual stock price movements. In general, “asset price boom and bust cycles… are fueled by the belief-updating dynamics of investors”, and thereby the optimism regarding future capital gains in a particular stock will often be the cause of the eventual increase in the stock's price. Provided that “tax-exempt perfect substitute securities exist”, investors should never realize their capital gains on stocks because it is possible to reduce the risk from a large position in a stock by “costlessly short selling a perfect substitute”.
Efficiency in the real estate markets
The interlink between psychology and capital gain is also frequently seen in stocks, a concept which is similarly explored by Dusansky & Koç. Since houses are not only consumption but often investment expenditures for families, expectations of capital gains through investing in the house as an asset rather than a consumption good has a strong influence on actual housing prices and demand. As stated by Dusansky & Koç, “an increase in housing prices increases the demand for owner-occupied housing services. If an individual redeems a bond for more than, or less than, the price they paid for the bond, the ATO states that this profit is “not treated as a capital gain” and that the profit should simply be included in the individual's tax return.