Capital gain refers to the profit earned by an individual when selling back their owned assets. In English, "capital" denotes the invested sum, and "gain" signifies an increase or profit. Thus, capital gain literally translates to profit from the invested sum.
Simply put, capital gain is the result of the difference between the selling and buying prices of an investment asset.
Conversely, the opposite of capital gain is a capital loss, which occurs when an asset's selling price is lower than its purchase price.
Types of Capital Gain Two commonly known types of capital gain are short-term and long-term capital gain. Here's a brief overview:
Short-Term Capital Gain Short-term capital gain, also known as the profit, earned within a short period, typically less than one year. This type of gain is often associated with high-risk, high-return investments, such as stocks.
Long-Term Capital Gain Long-term capital gain, on the other hand, is the profit obtained from investments held for a minimum of one year. Assets invested for long-term gains are generally less risky than stocks, which may experience significant fluctuations.
To achieve long-term capital gains, it is advisable to select assets with values that tend to rise over time and remain stable during economic instability, such as gold.
Distinguishing Capital Gain from Dividends Capital gain is occasionally confused with dividends. To better understand capital gain, let's explore the differences between the two based on the following factors:
- Investment Duration One key difference between capital gain and dividends is the investment duration. Investors targeting capital gains typically opt for assets bought with a small initial investment, providing high returns in a short time.
In contrast, dividends yield profits over the long term, typically on an annual basis.
To obtain significant dividends, a substantial initial investment is usually required.
Nature of Income Capital gain is an active and trading-oriented profit, requiring careful market activities. On the other hand, dividends are passive income, meaning no trading is necessary to gain profits within a predetermined timeframe.
Income Amount Dividend income is determined by the number of shares owned. For example, if the dividend is $100 per share, owning 10,000 shares would yield $1,000,000 in dividends.
In contrast, capital gain income is calculated based on the purchase and sale prices of the shares.
- Acquisition Time Dividends are received regularly, usually once a year, while capital gain can be realized at any time.
Capital Gain Formula The formula for calculating capital gain is:
Capital Gain = (Selling Price−Buying Price) × Quantity of Assets or Investment Products
Calculating Capital Gain and its Taxation After understanding the simple formula for capital gain, it's essential to calculate the tax imposed on investment activities. For stock investments, the applicable tax rate is usually 0.1%. So, what is the net capital gain after accounting for taxes?
In conclusion, this brief discussion sheds light on capital gain derived from investments over a specific period. Choosing investment assets for capital gain requires careful consideration. For novice investors, opting for low-risk assets like gold is advisable. Gold can be invested in both the short and long term, with its high liquidity making it suitable for emergency fund savings.