What is a Gain?
A gain is an increase in the value of an asset or property. A gain arises if the selling price of the asset is higher than the original purchase price. A gain can occur anytime in the life of an asset. If an investor owns a stock purchased for $15 and the market now prices that stock at $20, then the investor is sitting on a five dollar gain. That said, a gain only truly matters when the asset is sold and the gains are realized as profit. An asset may see many unrealized gains and losses between purchase and sale because the market is constantly reassessing the value of assets.
A gross gain refers to the positive difference between the sale price and the purchase price. A net gain takes transaction costs and other expenses into consideration. A gain may also be either realized or unrealized. A realized gain is the profit that is received when the asset is sold, and an unrealized gain, also known as a paper gain, is the increase since purchase while the asset is still owned by the buyer. Another important distinction between gains is when they are taxable or non-taxable, as taxes can have a large impact on how much of a gain actually ends up in an investor's pocket.
- A gain is the positive difference between what you pay for an asset and what you sell it for. If the difference is negative, it is a loss.
- Investors may talk about gains whenever the market price of an asset exceeds the purchase price they paid, but unrealized gains may come and go many times before an asset is sold.
- Once an asset that has seen a gain in value is sold, an investor is said to have realized the gain - or put more simply, made a profit.
Gains and Taxes
In most jurisdictions, realized gains are subject to capital gains tax. As well as applying to traditional assets, capital gains tax may also apply to gains in alternative assets, such as coins, works of art and wine collections. Capital gains tax varies depending on the type of asset, personal income tax rate and how long the asset gets held. A capital gain can typically be offset by a capital loss. For instance, if an investor realized a $50,000 capital gain in stock A and realized a $30,000 capital loss in stock B, they may only have to pay tax on the net capital gain of $20,000 ($50,000 - $30,000).
However, if the gains accrue in a non-taxable account - such as an Individual Retirement Account in the U.S. or a Retirement Savings Plan in Canada - gains will not be taxed.
For taxation purposes, net realized gains rather than gross gains are taken into consideration. In a stock transaction in a taxable account, the taxable gain would be the difference between the sale price and purchase price, after considering brokerage commissions.
Here is an example of how a taxable gain works:
- Jennifer buys 5,000 shares at $25 = $125,000
- Jennifer sells 5,000 shares at $35 = $175,000
- Jennifer’s commission is $200
- Jennifer’s taxable gain is $49,800 ($175,000 - $125,000) - $200)
Legendary investor, Warren Buffet, attributes compounding gains as one the key factors to accumulating wealth. The basic concept is that gains add to existing gains. For example, if $10,000 is invested in a stock and it gains 10% in a year, it generates $1000. After another 10% return in the following year, the investment generates $1,100 ($11,000 x 10% gain), after the third year of a 10% gain, the investment now generates $1,210 ($12,100 x 10% gain). Investors who start compounding gains at a young age have time on their side to build substantial wealth.