What Is Return on Capital Gains?

Jim B.

Return on capital gains is the amount of money earned by an individual through the sale of some sort of investment asset compared to the purchase price. Investment assets can be physical assets like homes or cars or can be investments like stocks or mutual funds. To calculate return on capital gains, the amount of profit earned from the sale of an asset is divided by the original purchase price of that asset, yielding a percentage gain. It is important for those people who are the recipients of capital gains to realize that they are taxable, albeit at a lesser rate than income.

Dividing an investment's profit by its original purchase price yields a percentage gain.
Dividing an investment's profit by its original purchase price yields a percentage gain.

There are different ways that a person can realize a profit from some sort of purchased asset. For example, a person who buys a house and then sells it years later after it has appreciated in value is achieving capital gains. In addition, an investor who buys shares of a particular stock at one price and then sells them after a period of time for a higher price is also receiving capital gains. The return on capital gains is a very similar concept to the investment yield, in that they both measure the percentage gain of an investment.

As an example of how return on capital gains is calculated, imagine that an investor buys shares of stock at a price of $100 US Dollars (USD) per share. A week later, he sells those shares at a price of $110 USD per share. As a result, the profit earned on the investment is $110 USD minus $100 USD, or $10 USD. This amount is then divided by the original purchase price of $100, yielding 0.1, which is expressed as a return of 10 percent.

Most people try to choose investments that offer the highest return on capital gains available. It is important to understand that capital gains are not actually realized until an asset is sold. In addition, it should be noted that dividends, which are paid out by companies to shareholding investors as a type of bonus, are generally not included in capital gains calculations but can definitely improve the overall return of an investment.

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While it is beneficial to receive a high return on capital gains, the amount of the return is still liable to be taxed. Investors must report capital gains on their tax filings. In most countries, capital gains are taxed at a lower rate than income. By doing this, a government can reward investment as a way of spurring the economy.

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