Capital gains refer to the profit made from selling a capital asset, such as stocks, real estate, or a business, for more than its original purchase price. The gain is the difference between the asset’s purchase price (cost basis) and its selling price. Capital gains are a key consideration for investors, as they directly impact investment returns and may be subject to taxation.
Capital gains are significant because they:
Types of Capital Gains
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?
Are capital gains taxed, and how much?
Yes, capital gains are taxed in most countries. Short-term gains are usually taxed at higher rates, while long-term gains often benefit from lower rates. The exact tax rate depends on your location and holding period.
How can startups offer capital gains to investors?
Startups generate capital gains for investors when the company grows in value and its shares are sold, either through acquisitions, exits, or public offerings.
What is the difference between capital gains and dividends?
Capital gains come from selling an asset at a profit, while dividends are regular payments made to shareholders from a company’s earnings.
Can capital gains be reinvested to avoid taxes?
In some cases, capital gains can be reinvested into qualifying investments (e.g., Opportunity Zones or specific tax-deferred accounts) to defer or reduce tax obligations. Always consult tax professionals for local regulations.
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