What is Capital Gain?
Capital gain is the increase in a capital asset's price (investment or real estate), which offers the asset a higher value than the purchase price. Until the asset is sold, the gain is not realised. A capital gain can be either be short-term (one year or less) or long-term (more than one year); it must be reported while filing income taxes.
Although capital gains are generally associated with stocks and funds due to their inherent price volatility, any security sold at a price higher than the purchase price paid for it may result in a capital gain. Realised capital gains and losses occur when an asset is sold, and a taxable event is triggered.
Unrealised gains and losses sometimes referred to as gains and losses on paper, reflect an increase or decrease in the value of an investment, but have not yet triggered a taxable event. When the value of a capital asset is reduced as compared to the purchase price of an asset, it is known as a capital loss.
Tax Consequences of Capital Gains and Losses
When you are considering to invest in a fund with a significant unrealised capital gain component, tax-conscious mutual fund investors should determine the unrealised accumulated capital gains of a mutual fund expressed as a percentage of its net assets. This is referred to as the exposure of capital gains from a fund.
For securities held for one year or less, short-term capital gains occur. Such gains are taxed as ordinary income on the basis of the tax filing status of the individual and adjusted gross income. By general, long-term capital gains are taxed at a lower rate than regular income.
Throughout the year, mutual funds that have earned realised capital gains will allocate those profits to shareholders. Before the end of the calendar year, several mutual funds allocate capital gains.
