DEFINITION of 'Gain'

A gain is an increase in the value of an asset or property. A gain arises if the selling or disposition price of the asset is higher than the original purchase or acquisition price. A gross gain refers to the positive difference between the sale price and the purchase price. A net gain takes transaction costs, such as commissions and other expenses into consideration. A gain may either be realized, i.e., when the asset is sold or unrealized, i.e., a paper gain. Another important distinction of a gain is that it may be taxable or non-taxable.                                                                                                                                               

BREAKING DOWN 'Gain'

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 stock1 and realized a $30,000 capital loss in stock2, 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 Registered 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.

Example of taxable gain:

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 interest (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.

 

 

 

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