Capital Gains Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Capital Gains, written in plain English, along with examples of how it is used.

What is Capital Gains?

(n) Capital Gains is the increase in the value of a property, or assets due to the effect of passage of time, inflation, increase in demand etc which accrues to the owner of the property or assets when they sell or dispose it finally. Capital gains are subjected to the deductions and exemptions before arriving the taxable income.

History and Meaning of Capital Gains

Capital gains is a term that refers to the profit made from the sale of an asset, such as property or stocks. It is the difference between the purchase price and the selling price of the asset. Capital gains can be short-term or long-term, depending on how long the asset was held before it was sold. The concept of capital gains has been around for centuries, with evidence of it being mentioned in ancient Roman law.

The modern concept of capital gains emerged out of the rise of capitalism in the 18th century. As countries began to industrialize, people started to buy and sell stocks, bonds, and other assets with the goal of making a profit. Capital gains taxes were eventually introduced as a way to generate revenue for governments while also discouraging excessive speculation and promoting long-term investing.

Today, capital gains taxes are a common feature of most countries' tax systems, and they play an important role in shaping investment behavior and economic growth.

Examples of Capital Gains

  1. John bought a house for $200,000 in 2010 and sold it for $300,000 in 2020. His capital gain on the sale was $100,000.
  2. Sarah bought 100 shares of Apple stock for $10,000 in 2019 and sold them for $12,500 in 2021. Her capital gain on the sale was $2,500.
  3. James inherited a painting from his grandfather that was valued at $50,000. He sold the painting for $75,000 a year later, resulting in a capital gain of $25,000.

Legal Terms Similar to Capital Gains

  1. Capital losses: The opposite of capital gains, which occurs when the value of an asset decreases between the time it is purchased and the time it is sold.
  2. Depreciation: A reduction in the value of an asset over time due to wear and tear or obsolescence.
  3. Cost basis: The initial purchase price of an asset, used to calculate capital gains or losses when the asset is sold.