A capital gain is a profit that results from the sale of an asset, whether it be stocks, bonds, or something tangible like real estate that amounts to more than the purchase cost. This difference between sale price and original price (cost basis) is the capital gain. Capital gains are often calculated for tax purposes. This article will tell you how to calculate capital gains.
Determine the original cost--which is also called the cost basis. The cost basis is the amount originally paid for the asset. For example, if you bought 50 shares of Stock XYZ for $500, the cost basis is $500 or alternatively $10 per share.
Determine the sale price of the asset. This is simply the final amount received in exchange for the asset. For example, if you sold the same 50 shares of Stock XYZ for $750, then the sale price is $750.
Subtract the cost basis from the sale price. In the same example, you would subtract $500 from $750 giving you a capital gain of $250.
Capital gains can be calculated at any time but the capital gain is not realized for most purposes until the asset is sold. Usually, capital gain calculated before selling the asset is referred to as unrealized.
When calculating capital gains for tax purposes (IRS Schedule D for Example), you will figure your capital gain or loss as in step 3. Enter the capital gain (or loss) in the appropriate box on the tax form. The tax on the capital gain is calculated depending on your tax bracket and whether the asset was a short-term or long-term hold. Use the additional resources given to find your tax bracket and determining your capital gain after taxes.
- For tax purposes, the length of holding of an asset determines at what rate the capital gains will be taxed. Usually after holding an asset for at least a year, the asset becomes long-term and its capital gains will be taxed at a lower rate.