Capital gain

Capital gain is an economic concept defined as the profit earned on the sale of an asset which has increased in value over the holding period.

[1] The official beginning of a practical application of capital gain occurred with the development of the Babylonian's financial system circa 2000 B.C.

[2] This system introduced treasuries where citizens could deposit silver and gold for safekeeping, and also transact with other members of the economy.

Capital gain is generally calculated through taking the sale price of an asset and subtracting its base cost and any incurred expenses.

[6] 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.

[7] 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”.

Taxpayers in Germany, pay a flat 25% (2024) capital gains tax on their profits from selling the stocks plus solidarity surcharge of 5.5% (2024).

[9] The United Kingdom HM Revenue and Customs (HMRC) office lists certain assets which are eligible to be considered as capital gains.

[11] The United States Internal Revenue Service (IRS) also provides guidelines on calculating capital gains.

The IRS defines a capital gain or loss as “the difference between the adjusted basis in the asset and the amount you realized from the sale”.

[18] The lock-in effect proposes that rather than realize capital gains on stocks, investors should instead revert to short-selling substitute securities.

For example, the Australian Taxation Office offers a full exemption of capital gains tax on the sale of a primary home, provided the individual or couple meets certain eligibility criteria.

[20] The interlink between psychology and capital gain is also frequently seen in stocks, a concept which is similarly explored by Dusansky & Koç.

[22] However, the United States Internal Revenue Service (IRS) does consider profits from the redemption or sale of a bond as a capital gain.