Capital Gain Definition, How to Calculate, And Types

Capital gains occur when investors sell shares or other types of assets at a price higher than the purchase price.

Capital gain is one of the most important things for investors, this is the discussion.

The main objective of investment is to achieve an increase in the amount of investor capital. In investment parlance, this gain is called a capital gain, or also known as a capital gain. So what are capital gains? What types of capital gains can investors get? What is the difference between dividends and capital gains? What is the formula for capital gains? has the full review below.

What is Capital Gain?

Capital gain is the amount of profit an investor makes when reselling his investment assets. Profits from capital gains are the difference between the sale price and the purchase price of the investment product.

The opposite of capital gain is capital loss. Capital loss is an investment loss because the selling price is lower than the purchase price. Just as capital gains can amount to tens to hundreds of millions, capital losses can also occur in large numbers.

Difference between Capital Gain and Dividend

After discussing what capital gains are, this time we will discuss the differences between capital gains and dividends. To be honest, until now many people still think dividends and capital gains are the same thing. Though both are different, even though both are profitable for investors. What are the differences between capital gains and dividends? This is the answer.

  1. Nature of Income
    The first difference between dividends and capital gains is the nature of their earnings. Investment dividends are passive. Because to get a profit, investors don’t need to do a lot of trading activities but just wait for the company’s profit for a certain period of time. Meanwhile, capital gains are active, because investors must be diligent in trading in the capital market. In this case, investors are required to think and analyze the capital market, because it affects the value of capital gains in the future.
  2. Investment Period
    The difference between dividends and capital gains lies in the investment period. Investors who like dividends usually like profits in the long term, because dividends are distributed only once a year. If you want more dividends, then the investment at the beginning of the year must also be bigger. Meanwhile, investors pursuing capital gains are those who have small capital, because the share price per lot in the capital market is cheaper than direct investment in companies. This kind of investor makes a profit when his shares experience an increase in the selling price compared to the purchase price.
  3. Transaction Time
    The next difference between dividends and capital gains is the length of the transaction. To make a profit, investors must be good at reading and analyzing market conditions. That way, you can see the right time to buy or sell shares. The right time to purchase investment instruments or shares in order to receive dividends is before the end of the cum date. Cum date is the time when dividends are obtained for investors who are registered in share ownership. Meanwhile, the right time to sell shares to obtain capital gains is when the ex date comes. The ex date period is the time span after the cum date, when investors are not included in share ownership so they do not get dividends.
  4. Time to Get Profits
    The last difference between dividends and capital gains is the timing of the distribution of profits. Earnings on dividends and capital gains are made at different times. Usually dividends are obtained regularly once a year. The amount of profit is determined by the General Meeting of Shareholders. While the period of profit from capital gains can be at any time. Because it is not tied to company policies, but depends on investors when to sell their assets.

Types of Capital Gains

After discussing the difference between dividends and capital gains, this time we will discuss the most common types of capital gains investors get. The types of capital gains are as follows.

  1. Short-Term Capital Gains (Short-Term Capital) Short-term
    capital gains are investment profits from the sale of shares in less than a year. This type of capital gain is usually carried out by risk-loving investors. If you want to get short-term capital gains, investors must have strong analytical and predictive abilities.
  2. Long-Term Capital Gains (Long-Term Capital) Long-term
    capital gains are the gains from owning shares for a minimum period of one year. This type of capital gain is most preferred by casual investors, who don’t spend time monitoring the stock market. If you want to get long-term capital gains, you should not sell shares after a year of owning them, but more than that. This is because the majority of stock prices do not experience significant changes in one year.

The Capital Gain Formula Here’s the Tax Calculation

After discussing what capital gains are, the difference between dividends and capital gains, and their types, this time we will discuss the formula for capital gains. The formula for capital gains is as follows.

Capital Gain = Selling Price – (purchase price x number of products purchased or invested)

In calculating capital gains, you also need to pay attention to the imposition of taxes on capital gains. Tax on capital gains is an additional income tax expense charged to investors and must be paid as tax payable.

An example of calculating tax on capital gains is as follows:

A person bought shares in 2011 for $ 10 million and kept the asset until 2021. When it was about to be sold, the current share price had reached % 50 million for 10 years. From this case, the calculation of the capital gain formula is:

Capital Gain = Selling Price – (purchase price x number of products purchased or invested)
Capital Gain = $ 50 million – ($ 10 million x 1)
Capital Gain = $ 40 million

So, it is known that the amount of capital gain is $ 40 million. While the amount of tax on capital gains that must be paid when the tax percentage at that time was 15%, namely:

Tax amount = $ 40 million x 15% = $ 6 million.

So based on the case above, the tax amount on capital gains is $ 6 million.

Thus a discussion of what capital gains are, types, formulas, and the difference between them and dividends. Capital gain is something that you must understand carefully, especially if you want to become an investor. Because, not only dividends, capital gains are also a factor in investment success. The higher the value of your capital gain, the more successful your investment will be. So, happy investing!

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