The profit earned from selling an asset or a cryptocurrency at a higher price than its original purchase price.
Capital gain is a fundamental concept in both cryptocurrency and accounting. It refers to the profit earned when an asset is sold at a higher price than its original purchase price. This gain is realized only when the asset is sold or disposed of, and until then, it remains a potential gain on paper.
When you purchase an asset like cryptocurrency, stocks, real estate, or any other investment, you acquire it at a specific price, known as the "cost basis" or "purchase price." If the value of the asset increases over time, and you sell it at a price higher than the cost basis, the difference between the selling price and the original purchase price represents the capital gain.
Capital gains can be either short-term or long-term, depending on the holding period of the asset:
If you sell the asset within a year of purchase, any profit earned is considered a short-term capital gain. Short-term capital gains are typically taxed at higher rates than long-term gains.
If you hold the asset for more than a year before selling it, the profit qualifies as a long-term capital gain. Long-term capital gains often receive more favorable tax treatment than short-term gains, with potentially lower tax rates.
Let's consider two examples to illustrate capital gain:
Mary buys 1 Bitcoin for $10,000. After holding it for two years, she sells the Bitcoin for $50,000. Her capital gain is $40,000 ($50,000 - $10,000). Since Mary held the asset for more than a year, this is a long-term capital gain.
John purchases 100 shares of a tech company's stock at $50 per share. After six months, he decides to sell the shares for $75 each. John's capital gain is $2,500 ($75 - $50) x 100. Since John sold the shares within a year, it is considered a short-term capital gain.
