Capital Gain

Financial Dictionary -> Investing -> Capital Gain

Capital Gain (often applied to real estate, although it can be applied to any asset) is a term that refers to the amount by which an item's current selling price exceeds the price of the item's initial purchase. In other words the asset's value has increased over time and hasn't depreciated but actually appreciated.

All sorts of items and financial instruments can see capital gains, from everyday items that become antiques, to old collector's items, to regular investments like mutual funds, stocks, bonds and options to property as mentioned.

When a capital gain is held, but the item has yet to be sold to make the profit it is known as an unrealized capital gain. In theory, overtime, if the item is not sold the capital gain may decrease. If the item is sold this is known as a realized capital gain and can be claimed on income taxes.

Generally, along with inflation, real estate prices consistently rise. Meaning the house you bought in 1990, should in theory be now worth a lot more than when you bought it. This excess is the capital gain. This is obviously not always the case in regards to times of financial crisis.

A common practice is to hold on to what is perceived as a valuable item or what might become a rare collector's item in the future, to see if it is worth something more in several years as the item becomes ever rarer or holds some sentimental value. An example of this might be the rookie card of a baseball player that ends up with a record breaking career.

Products that are running out will see a capital gain in the future. An example would be oil and rising fuel costs. Buying up oil during times when it is hard to obtain can lead to capital gains.