Definition and Types of Capital Gains

Capital Gains: The increase in value of investment assets above their original purchase cost, resulting from rising market values of stocks, bonds, real estate, commodities, and currencies. Calculated by subtracting original cost (including expenses) from net sale price. Classified accounting-wise as capital revenue separate from operating revenue, and tax-wise may be subject to different rates than ordinary income based on holding period and type.

Types:

• Realization: Realized (upon sale) and unrealized (market valuation)
• Duration: Short-term (less than one year) and long-term (more than one year)
• Source: Stocks, bonds, real estate, currencies, commodities
• Taxation: Taxable or exempt based on type and duration

Accounting Treatment and Financial Statement Presentation

Accounting Treatment of Capital Gains:

Realized Gains: From Cash Account to Investment Account (cost) to Investment Sale Gains Account

Unrealized Gains: From Investment Account to Unrealized Gains Account

Presentation in Financial Statements:

Income Statement: Listed under "Investment Income" or "Capital Gains" separate from operating revenue, as they result from investment liquidation rather than core business operations.

Balance Sheet: Indirectly reflected through changes in sold investment balances, where the book value of disposed assets is removed and gains are added to equity.

Cash Flow Statement: Recorded under "Investment Activities" as proceeds from investment liquidation, separating total proceeds received from realized gains.

Tax Reports: Reported as taxable income with distinction between short-term gains (one year or less) treated as ordinary income, and long-term gains (over one year) that may qualify for preferential tax rates.

Capital Gains Tax Calculation Method

Phase One - Data Collection: Compile complete acquisition cost including purchase price, commissions, and legal fees; determine final sale amount after deducting brokerage commissions and fees.

Phase Two - Calculate Net Gain: Capital Gain = Net Sale Proceeds - Total Acquisition Cost

Phase Three - Duration Classification: Determine holding period to identify tax treatment, as rates differ between short-term and long-term investments.

Final Phase - Apply Rate: Tax Owed = Capital Gain × Applicable Tax Rate

Practical Example:

• Property acquisition: $800,000 with $25,000 fees (total $825,000)
• Sale: $1,200,000 minus $30,000 fees (net $1,170,000)
• Capital gain = $1,170,000 - $825,000 = $345,000
• Tax (at 20% rate) = $345,000 × 0.20 = $69,000