Capital Gains

Capital gains are significant because they:

• Generate Profit: Selling assets at a higher price provides substantial financial returns.
• Support Investment Strategies: Understanding capital gains helps investors make informed decisions about buying and selling assets.
• Attract Investors: Investors often seek startups that offer potential capital gains through equity growth or exits.
• Fund Growth: Founders and early investors can reinvest gains into new ventures or business opportunities.
• Impact Taxes: Capital gains are taxable, making tax planning crucial for individuals and businesses.

Types of Capital Gains

1. Short-Term Capital Gains: Profits earned from selling assets held for one year or less. These are often taxed at higher rates, as they are treated as ordinary income.
2. Long-Term Capital Gains: Profits earned from selling assets held for more than one year. These are typically taxed at lower rates, encouraging long-term investments.

Capital gains are calculated using the formula:

Capital Gain = Selling Price – Purchase Price (Cost Basis)

Example: If you purchased startup shares for €1,000 and sold them for €5,000:
Capital Gain = 5,000 – 1,000 = €4,000

In this case, the €4,000 is the capital gain and may be subject to taxation based on local laws.

What is the difference between realized and unrealized capital gains?

• Realized Capital Gains: Gains that occur when an asset is sold, turning the profit into actual cash.
• Unrealized Capital Gains: Gains on assets that have increased in value but have not yet been sold. These remain “on paper” until a sale occurs.

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