Capital gains are the profits you make when you dispose of an asset for more than it cost you. The gain is the difference between your sale proceeds and your cost basis after trading fees and any relevant adjustments.
You might see capital gains on shares, funds, property and crypto, or on other assets held for investment. A negative result is a capital loss.
What counts as a capital gain?
A gain usually arises when you sell an investment. It can also arise on other forms of disposal, such as gifting, swapping one coin for another, being bought out in a takeover, or receiving cash in lieu during a corporate action. Even if no cash changes hands, an event that replaces one holding with another can crystallise a gain or loss based on market values at that time.
Simple example. You buy 100 shares at £10 and pay a £10 commission. Your total cost basis is £1,010. You later sell the 100 shares at £13 and pay another £10 commission. Your net proceeds are £1,290. The capital gain is £1,290 minus £1,010, which is £280.
Not all gains are treated the same way. Some instruments blur the line between capital return and income return. For example, a bond’s price rise is typically a capital gain while the coupon is income. With options, closing a profitable position can generate a capital gain, but exercising an option usually rolls the option premium into the cost basis of the acquired shares. Treatment depends on the product and the jurisdiction.
Realised vs unrealised gains
An unrealised or paper gain is the increase in value of an open position. It moves with the market and can reverse. A realised gain is locked in when you dispose of the holding. Many statements show both figures. Traders often track mark-to-market performance daily, but for tax and financial reporting the realised number is usually what matters. Rules can differ for certain derivatives where gains may be recognised more frequently.
How to calculate a capital gain step by step
In principle the calculation is simple. In practice, the details matter. Here is the usual logic.
- Work out your cost basis. Start with the purchase price. Add direct costs like commissions, stamp duties or platform fees that are linked to that trade. If you reinvested dividends or distributions into more shares, each reinvestment creates a new lot with its own basis.
- Choose or apply a lot method for partial sales. If you sell part of a position built over time, you need to decide which units you sold. Common methods include FIFO, LIFO and specific identification. The method available and the default can vary by broker and by jurisdiction.
- Calculate net proceeds. Take the sale price multiplied by the number of units sold, then subtract selling costs such as commissions or exchange fees.
- Adjust for corporate actions. Stock splits, bonus issues, rights issues and spin-offs change the number of units or move part of the original value into a new holding. Your cost basis must be allocated accordingly. Issuers usually publish allocation ratios.
- Handle foreign currency. If you bought and sold in a currency different from your home reporting currency, you generally convert the cost and the proceeds at the relevant rates for each date. That can create gains or losses from both the asset move and the currency move.
Worked example with lots. You buy 50 shares at £20, then 50 more at £24. Total cost basis is £1,000 + £1,200 = £2,200 plus fees. Later you sell 60 shares at £25. Under FIFO, the first 50 come from the £20 lot and the next 10 from the £24 lot. Your cost basis for the sale is 50 × £20 + 10 × £24 = £1,000 + £240 = £1,240. Proceeds are 60 × £25 = £1,500, less selling fees. Ignoring small fees for simplicity, the realised gain is about £260. Your remaining 40 shares keep their original £24 basis per share.
Capital gains versus income
Capital gains are different from income you earn from holding an investment. Dividends from shares and interest from bonds are generally income. A price rise when you sell is generally a capital gain. This split matters because many tax systems apply different rules to each category, including rates, allowances and reporting. The split can also affect how investors build portfolios. Some prefer holdings that pay out income. Others prefer to let gains compound within the asset and realise them selectively.
Short term, long term and tax headlines
Many countries distinguish between shorter holding periods and longer holding periods for gains. The thresholds, rates and reliefs differ and can change. Some systems allow a tax-free allowance up to a certain level of gains each year. Pooled funds may distribute gains that the manager has realised inside the fund, which then appear on investor statements even if no units were sold by the investor. Exchange traded fund structures can deliver different outcomes depending on the market. Always check the current rules in your jurisdiction if tax treatment matters to you.
Capital losses and common pitfalls
A capital loss is simply the opposite of a gain. In many places, losses can offset gains. Unused losses may be carried forward to future years. There are often anti-avoidance rules that limit selling to realise a loss and then quickly repurchasing the same or substantially identical asset. The cooling-off period and definitions vary by country. Keep records so you can prove what you sold and when.
Two other points trip people up:
- Derivatives and leveraged products. Contracts for difference, spread bets, futures and options can produce rapid gains or losses and may have different tax or reporting treatment from ordinary shares. They can also be marked to market daily. Product and jurisdiction matter.
- Corporate actions. A spin-off or a merger that involves cash and shares often needs a basis split across old and new holdings. If you ignore the split, later gains may look larger or smaller than they should.
Where investors typically encounter capital gains
Capital gains appear across the market:
- Shares and ETFs. Selling at a higher price realises a gain. Funds can also distribute gains from trades made by the manager.
- Bonds. A bond bought below its redemption value can generate a capital gain if yields fall and the price rises. The coupon remains income.
- Property. Profit on a sale is a capital gain, though primary residences and investment properties are treated differently in many systems.
- Crypto. Swapping one token for another or spending crypto can count as a disposal. That can crystallise gains or losses even if no fiat currency is involved.
Keeping clean records
Accurate records make capital gains straightforward. Keep trade confirmations, corporate action notices and distribution statements. Track reinvested dividends because they create new lots and change your basis. If you hold assets in more than one currency, store the relevant exchange rates on the dates of each trade. Many platforms export transaction histories and annual summaries, though the format and detail vary. Good records save time and reduce the risk of errors when you come to report results or assess performance.