A capital gain is basically a realized profit. It occurs when you've invested capital in something, and then sold it at a profit. (If you sell it at a loss, you have a capital loss.)

The term capital gain is mostly used for tax purposes. In Canada at least, capital gains are taxed differently (and more favourably - the current rate, after a recently (October 2000) announced reduction, is that only 50% of the amount of capital gains are taxable) than other income. This is an effort by the government to encourage investment in the canadian equity markets, which generally has a stimulative effect on the economy. Ahhh, progress marches on.

To clarify, consider an example:

  • You own, say, an ice cream business.
  • You buy a premises for $100,000.
  • Two years later, you sell the same premises for $150,000 -- it's not that you've done anything to improve it at all, it's just it's the way real estate works.

Then you have made capital gains of $50,000. The thing that distinguishes from normal profits is that it's not the result of normal profit-making activities -- in this case, the increase in the value of the premises has nothing to do with selling ice cream. It's just a bonus.

Capital gains is also applied to the business itself, on what is called goodwill. The goodwill of a company is the difference between what the company's property is worth and how much it is sold for. For example, if a company owns $100,000 worth of stuff and owes nobody anything, but it gets sold for $200,000, then there is a goodwill of $100,000. Increases in goodwill are considered capital gains. This is also taxable, even though it could be argued that this was perhaps a direct result of the company's activities.

Some countries also have inflation-adjusted capital gains, in other words, you only pay capital gains on the sum over and above the increase in things' values due to inflation.

Log in or register to write something here or to contact authors.