Capital gain is an increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the basis of the asset. Capital gains can also be thought of as the profit from the sale of a capital asset where the sale price exceeds the asset’s adjusted basis.
Short-term capital gains, which generally applies to assets held for less than one year, are taxed at an investor’s ordinary income rate. Long-term capital gains, which generally applies to assets held for greater than one year, are subject to capital gains tax, which is generally lower than the ordinary income rate.
As an example capital gain calculation, if a taxpayer purchased an investment property for $1,000,000 and claimed $200,000 of depreciation over their holding period (resulting in an $800,000 adjusted basis), and subsequently sold the asset for $1,200,000, the taxpayer’s capital gain would be $400,000 (sales price less adjusted basis).