Capital gains definition

What is capital gains?

Capital gain is the profit that you get when you sell an asset for a price higher than its original purchase price. In this context, ‘capital’ just means ‘money’. So when you realise a ‘capital gain’, you’ve sold whatever you had and you’ve earned money.

 

How to calculate your capital gain

Capital gains is calculated as the difference between the selling price – or current market value – of the asset, and what you paid for it. Capital gains can be generated from the sale of various types of assets, including stocks, real estate, precious metals, and other investments.

If you’ve got investments with a market value that’s higher than you paid to buy them, but you haven’t sold them yet, you have what’s known as an ‘unrealised’ capital gain. When you sell the asset, you’ve realised the capital gain.

 

Types of capital gains

There are typically two main categories of capital gains:

Short-term capital gains: these are profits made from the sale of assets held for one year or less. In many tax systems, short-term capital gains are often subject to higher tax rates compared to long-term gains.

Long-term capital gains: these are profits from the sale of assets held for more than one year. Long-term capital gains often receive more favourable tax treatment, with lower tax rates in many countries, to incentivise long-term investment.

 

Capital gains tax

You’ll hear about this a lot when talking about capital gains. Capital gains tax is the tax that you might have to pay when you realise a capital gain if it pushes you over your annual tax-free capital gains allowance. For the 2024/25 UK tax year, this amount is set at £3,000.

A sure-fire way to avoid paying any capital gains when you sell your investments is to invest with a Stocks & Shares ISA. All investment gains you make with this account are tax-free, and you can invest up to £20,000 each tax year.

 

All investing should be long term (min. 5 years). The value of your investments can go up and down, and you may get back less than you invest.

Tax treatment depends on individual circumstances and is subject to change.