A capital gain is a taxable event that occurs when an asset is sold for more than the purchase price.
The important distinction is the act of selling, which separates it from a “paper” gain and is the reason that the increase in value is considered taxable income. An increase in value over the purchase price of an asset that remains unsold is considered unrealized, and is not subject to taxation.
Capital gain is an important concept for traders to understand because it plays a significant role in the overall profitability of their trading and it is a critical element in the necessary clerical paperwork that they need to file.
If the profit from each trade is subject to a 30% capital gain tax, for example, then every $100 of trading profit is actually only worth $70 to the trader in the end. In terms of legal reporting requirements, traders need to file their gains as part of their taxes for the year, just like any other form of income.
Capital Gain & Taxation
Capital gain is considered a form of income and is subject to taxation. The taxation systems in most developed countries recognize capital gain as a separate form of income with its own rates and rules, and usually faces a flat rate that is significantly lower than the average rate of taxation on standard income.
In addition, capital gain taxation systems allow for a balance of gains versus losses, so that only the total gain over the span of the full taxation period is considered taxable income.
In some countries, including the Unites States, there is a distinction between short term and long term capital gain, where the short term is for any asset that is bought and sold in less than one year.
In these countries, short term gain is considered a normal source of income, and is subject to the standard income taxation system and rate (which is usually significantly higher).
Dealing With Your Capital Gain
It is important to remember that each successful trade is subject to taxation, and that your trading profits will need to be discounted accordingly. It is also critical that you practice responsible accounting of your trading and file your capital gain as part of your taxes each year.