What is a capital gain?

A capital gain refers to the profit that an investor realizes when they sell an asset or investment for more than its purchase price. For example, if an individual buys shares of stock for $100 and later sells them for $150, the $50 difference represents the capital gain. This definition captures the central concept in investing that relates to the increase in value of an asset over time, reflecting successful investment strategies and market performance.

Understanding capital gains is essential for investors, as they impact investment returns and tax obligations. It’s important to note that capital gains can be classified as short-term or long-term, depending on how long the asset is held before selling. Short-term gains are typically taxed at ordinary income rates, while long-term gains, from assets held over a year, often enjoy lower tax rates. This differentiation in tax treatment can influence investment decisions.

The other choices do not accurately describe capital gains. The loss incurred from selling an investment is referred to as a capital loss. The cost incurred to acquire an asset pertains to the purchase price or basis of the asset, which is different from the profit realized upon its sale. Lastly, the tax paid on investment income relates to how capital gains are taxed but does not define what a capital gain is.