A capital gain is the positive difference between the price at which you sell an asset and the price at which you bought it. It is one of the most universal concepts in investment taxation.
Universal principles of capital gains:
- The taxable event is the sale: while you hold the asset, the gain is 'unrealised' or 'latent' and is not taxed. Only when you sell does it become 'realised' and create a tax obligation.
- Short vs long term: most countries distinguish between gains generated in less than a year (short term, higher tax rate) and more than a year (long term, more favourable rate). This distinction incentivises long-term holding.
- Capital losses: if you sell for less than you paid, you generate a loss. In most tax systems, losses can offset gains in the same period, reducing the tax bill.
💡 Example
You buy 10 shares at 100 each (total cost: 1,000). Years later you sell them at 160 each (proceeds: 1,600). Capital gain: 600. Only at that moment of sale is the taxable event created. (Note: this example is purely illustrative.)