Gains: Meaning and Examples of a Transaction Outcome

What Is a Gain?

A gain is a general increase in the value of an asset or property. A gain arises if the current price of something is higher than the original purchase price. For accounting and tax purposes, gains may be classified in several ways, such as gross vs. net gains or realized vs. unrealized (paper) gains. Capital gains may additionally be classified as short-term vs. long-term in nature.

A gain can be contrasted with a loss, which occurs when property or assets held lose value compared to their purchase price. A loss can thus be construed as a negative gain.

Understanding a Gain

A gain refers generally to the positive difference between the price of something at acquisition and its current 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 an increase in value since purchase while the asset is still owned by the buyer and not yet disposed of.

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.

For investors and traders, 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 $5 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.

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. Short-term gains are generally taxed as ordinary income, while long-term gains (held longer than one year) are taxed more favorably.

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).

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.

Taxable Gain Example

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

Compounding Gains

Legendary investor Warren Buffet attributes compounding gains as one of 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 $1,000. After another 10% return in the following year, the investment generates $1,100 ($11,000 x 10% gain), and 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.