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Capital Gains / Capital Losses

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Definition:

Capital Gains or Capital Losses are the profits or losses a company or individual experiences on the sale of a capital asset. In other words, if the sale price of an asset is higher than the owner's basis in that asset, the result is a capital gain. If the selling price is less than the basis, the result is a capital loss.

Almost everything a business owns and uses as investment is a capital asset. When a capital asset is sold for a profit, a capital gain results. If a capital asset is sold at a loss, a capital loss results.

For example, if a company purchases a building for $200,000 and sells it two years later for $300,000, the $100,000 is considered a long-term capital gain.

Individual shareholders or business owners who sell their capital shares or owners equity in a business also incur capital gains or capital losses from those sales.

Capital gains and losses are different from operating gains and losses. Operating profits result from the on-going operations of the business; operating losses (sometimes called Net Operating Losses (NOL) for tax purposes) also result from the day-to-day operations. Capital gains and losses, on the other hand, result from single transactions in which the business incurs a gain or loss.

Capital gains and losses come in two varieties: long-term and short-term. Short-term capital gains or losses are on assets held for a year or less before being sold. Long-term capital gains are on assets held for more than a year before being sold.

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