Capital Gain: Formula And Taxes On Unrealized/Realized Gains

Table of Contents

1. What is Capital Gain?
2. How to Calculate Capital Gain
3. Capital Gain Formula
4. Topic No. 409 Capital Gains and Losses (IRS)
5. What is the Difference Between Unrealized Capital Gains vs. Realized Capital Gains?
6. What is the Difference Between Short-Term vs. Long-Term Capital Gain?
7. Short-Term Capital Gains Tax Rates in 2022
8. Long-Term Capital Gains Tax Rates in 2022
9. Capital Gains Tax Calculator: U.S. Corporate Example

What is Capital Gain?

A Capital Gain occurs when the value of an investment – typically in equity (stocks) or debt instruments – rises above the initial purchase price post-sale.

How to Calculate Capital Gain

If an investment is sold at a price that exceeds the original price paid on the date of initial investment, then there is a capital gain.

The most common examples of assets that are regularly purchased and sold are:

• Stocks
• Bonds
• Loans
• Real Estate Property
• Cryptocurrencies
• Collectibles (e.g. Artwork)

Conversely, if the investment is sold to a buyer at a price lower than the initial price, there is no capital gain, but rather a capital loss – which brings about certain implications to taxes.

Capital gains can be taxed, unlike capital losses, which cannot be taxed.

Moreover, capital gains are factored into a specific individual/company’s taxable income (EBT) and are charged at the prevailing tax rates in the appropriate jurisdiction.

Learn More → Hedge Fund Quick Primer

Capital Gain Formula

The formula to calculate the capital gain on an investment is as follows.

Capital Gain = Current Market Price – Original Purchase Price

• Realized Capital Gain → If the security is sold, i.e. the investor exited the position, the gain is considered to be a “realized” capital gain.
• Unrealized Capital Gain → But if the security has not yet been sold, the paper gain is an “unrealized” capital gain (and is not a form of taxable income).