Definition of Capital Gain

Capital gain is the amount of gain that is achieved by subtracting the cost of an asset from the current fair value of that asset. Important thing is that the capital gain is realized only when the asset is sold to another party.


Example of Capital Gain:

Mr Sam inherited 5000 shares in ABC company from his grandfather. The shares originally were purchased by Sam’s grandfather 25 years ago when the cost of one share in ABC ltd was $5.00. Now the share in ABC is trading at $15.00 The capital gain, in this case, will be

Capital gain = Current fair value of asset – cost of asset

Capital gain = (5000 shares x $15.00) – (5000 shares x $5.00) = $50,000

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