What is a capital gain?
– A capital gain is the increase in value of a capital asset that you realize when you sell it for more than you paid. Capital assets include investments (stocks, bonds, funds), real estate, and personal items (furniture, vehicles). If you sell for less than you paid, that difference is a capital loss.
Realized vs. unrealized gains
– Realized gain: a taxable event that occurs when you sell the asset and lock in the profit.
– Unrealized gain (paper gain): a rise in value that exists while you still own the asset; it is not taxed until you sell.
Short-term vs. long-term gains
– Short-term capital gain: an asset sold after being held for one year or less. Taxed as ordinary income at your marginal tax rates.
– Long-term capital gain: an asset sold after being held for more than one year. Usually taxed at preferential long-term rates (0%, 15%, or 20%), depending on your taxable income and filing status.
Key tax points and special rules
– Both short- and long-term gains must be reported on your tax return for the year in which the sale occurs.
– Long-term rates are typically 0%, 15%, or 20%. Certain items—collectibles, for example—may face a higher maximum rate (up to 28%). Some real-estate-related gains can be taxed at a higher rate (commonly referenced up to 25% for certain types of property gain).
– High-income taxpayers may also owe an additional net investment income tax (NIIT) on top of capital gains tax.
– Home-sale exclusion: when you sell your primary residence, a portion of the gain can be excluded from tax—commonly $250,000 for single filers and $500,000 for married couples filing jointly—if you meet the ownership and use rules.
– Mutual funds: when funds realize gains during the year, they typically distribute them to shareholders (often before year-end). Those distributions reduce the fund’s NAV by the distribution amount but do not change total return. Shareholders receive Form 1099-DIV reporting short- and long-term gain distributions; undistributed long-term gains can be reported on Form 2439.
What is a net capital gain?
– Net capital gain = total realized capital gains minus realized capital losses for the year. If gains exceed losses, the remainder is a net capital gain (subject to taxation). If losses exceed gains, you have a net capital loss (treatment depends on tax rules not reproduced here).
How to calculate a capital gain (simple formula)
– Capital gain = Sale proceeds − Cost basis
– Cost basis is typically what you paid to acquire the asset (purchase price). If transaction fees apply, adjust the formula to subtract fees from proceeds or add purchase fees to basis.
– Realized gain = (Sale price × shares) − (Purchase price × shares), if applicable.
Worked numeric example (step-by-step)
– Scenario: You bought 100 shares of stock at $350 per share on Jan. 30, 202
2021. You sold the entire position on Sept. 15, 2021 for $420 per share. Work the numbers step by step.
Step 1 — calculate raw proceeds and cost basis
– Purchase: 100 shares × $350 = $35,000 (cost basis before fees).
– Sale: 100 shares × $420 = $42,000 (sale proceeds before fees).
Step 2 — adjust for transaction fees (if any)
Assume a $10 commission at purchase and $10 at sale.
– Adjusted cost basis = $35,000 + $10 = $35,010.
– Adjusted sale proceeds = $42,000 − $10 = $41,990.
Step 3 — compute the realized capital gain (simple formula)
Capital gain = Sale proceeds − Cost basis
Capital gain = $41,990 − $35,010 = $6,980.
Step 4 — compute percent gain
Percent gain = (Capital gain / Cost basis) × 100
Percent gain = ($6,980 / $35,010) × 100 ≈ 19.94% (about 20%).
Step 5 — determine holding period and tax category
– Holding period = date sold − date bought = Jan. 30, 2021 to Sept. 15, 2021 = ~7.5 months → short-term (held less than 1 year).
– In many tax systems (including the U.S.), short-term capital gains are taxed at ordinary income tax rates; long-term gains (held more than 1 year) often qualify for lower, preferential rates.
Example: after‑tax result (hypothetical)
– Assume a short-term marginal tax rate of 24% (this is a hypothetical example only).
– After-tax capital gain = Pre-tax gain × (1 − tax rate) = $6,980 × (1 − 0.24) = $6,980 × 0.76 = $5,304.80.
Key formula summary
– Capital gain (loss) = Sale proceeds − Cost basis.
– Adjusted cost basis = Purchase price × shares + purchase fees + adjustments (reinvested dividends, improvements for property, etc.).
– Adjusted proceeds = Sale price × shares − selling fees − selling expenses.
– Percent gain = (Capital gain / Cost basis) × 100.
– After-tax gain (rough) = Capital gain × (1 − applicable tax rate).
Common adjustments and special cases (what to watch for)
– Stock splits: number of shares and per‑share basis change; total basis stays the same. Example: 2-for-1 split doubles shares and halves per‑share basis.
– Reinvested dividends (DRIP): treated as additional purchases — add dividends reinvested to basis.
– Wash sale rule (U.S.): if you sell at a loss and buy a substantially identical security within 30 days before or after the sale, the loss may be disallowed and added to the basis of the replacement shares.
– Gifts and inheritances: basis rules differ (gift basis typically carries over donor’s basis; inherited assets often receive a stepped‑up basis at date of death — check local tax law).
– Real vs. nominal gain: to estimate “real” gain after inflation, divide nominal gain by (1 + inflation rate) or subtract inflation-adjusted cost basis — but tax systems usually tax nominal gains.
Step-by-step checklist to calculate a capital gain for a sale
1. Gather documentation: trade confirmations, broker statements, 1099-B (or local equivalent).
2. Determine acquisition cost: purchase price × quantity.
3. Add purchase adjustments: commissions, fees, reinvested dividends, improvements (for real assets).
4. Determine sale proceeds: sale price × quantity.
5. Sub
tract selling costs and add any sale adjustments (e.g., selling commissions, transaction fees, transfer taxes) to compute net sale proceeds. 6. Compute capital gain or loss: net sale proceeds − adjusted cost basis = capital gain (positive) or capital loss (negative). 7. Check holding period: calendar days (or trade-date rules) between acquisition and disposition determine short‑term vs long‑term status — this affects tax rates in many jurisdictions. 8. Apply disallowed adjustments: if rules like the wash‑sale rule (disallowed loss on repurchase within a set window) or involuntary conversions apply, modify the gain/loss accordingly. 9. Offset and net: combine gains and losses across transactions for the tax period, apply any loss carryforwards or capital loss limitations per your tax code. 10. Report and record: enter transactions on the appropriate tax forms (and keep supporting documents) and reconcile broker statements to your tax return.
Checklist summary (quick):
– Gather trade confirmations and broker 1099/statement.
– Compute adjusted cost basis (purchase price × qty + buy costs + adjustments).
– Compute net sale proceeds (sale price × qty − sell costs − sale adjustments).
– Subtract to get gain/loss.
– Determine holding period and apply tax treatment.
– Adjust for wash‑sale and other rules.
– Net across the year and report on tax forms; retain records.
Worked numeric example
Assumptions: U.S. style calculations for illustration only; no corporate actions, no dividends reinvested, no wash sale.
– Bought 100 shares at $20.00 per share. Buy commission = $10.
Adjusted cost basis = (100 × $20.00) + $10 = $2,000 + $10 = $2,010.
– Sold 100 shares at $35.00 per share. Sell commission = $10.
Net sale proceeds = (100 × $35.00) − $10 = $3,500 − $10 = $3,490.
– Capital gain = Net sale proceeds − Adjusted cost basis = $3,490 − $2,010 = $1,480.
Interpretation: $1,480 is the nominal capital gain. Whether it’s taxed, at what rate, or whether any loss offsets apply depends on holding period and local tax law.
Key pitfalls and practical tips
– Forgetting transaction costs: commissions and fees reduce proceeds or increase basis; include them.
– Missing corporate actions: splits, spin‑offs, and mergers change share counts and per‑share basis — adjust before computing gains.
– Wash‑sale and related‑party rules: these can disallow or defer losses.
– Noncash considerations: received property or stock as sale consideration requires fair‑market‑value accounting.
– Recordkeeping: keep originals of trade confirmations, 1099‑B (or local equivalent), and cost basis calculations for several years per tax authority guidance.
Formulas (compact)
– Adjusted cost basis = Σ(purchase price × qty) + purchase costs + basis adjustments.
– Net sale proceeds = Σ(sale price × qty) − selling costs − sale adjustments.
– Capital gain/loss = Net sale proceeds − Adjusted cost basis.
Notes and assumptions
– Tax rules vary by country and over time; holding period definitions and tax rates differ.
– This guide focuses on calculation mechanics, not tax planning or law. Always verify with current local rules.
Educational disclaimer
I’m providing general information for educational purposes, not individualized tax or investment advice. Consult a qualified tax professional or financial advisor for advice tailored to your situation.
Sources
– IRS — Topic No. 409 Capital Gains and Losses: https://www.irs.gov/taxtopics/tc409
– Investor.gov (U.S. Securities and Exchange Commission) — Glossary: Capital gain: https://www.investor.gov/introduction-investing/investing-basics/glossary/capital-gains
– Investopedia — Capital Gain: https://www.investopedia.com/terms/c/capitalgain.asp
– UK Government — Capital Gains Tax overview: https://www.gov.uk/capital-gains-tax