What are capital gains?

Capital gains refer to the profits realized from the sale of an asset when the selling price is higher than the purchase price. When an investor sells a stock, real estate, or another investment for more than what was originally paid, the difference between these two prices is the gain, which is categorized as a capital gain. This concept is fundamental in investing because it serves as a key driver of investment returns.

For example, if an investor buys a stock at $50 and later sells it for $70, the capital gain is $20. This gain can be subject to taxation, depending on the holding period and the tax rules in a particular jurisdiction. Understanding capital gains is crucial for investors as it impacts their overall financial strategy and after-tax returns.

The other concepts mentioned do not correctly define capital gains. Losses from investment sales are the opposite of gains and are often referred to as capital losses. The current market value of stocks does not necessarily imply any profit or loss; it's a measure of worth at a specific time. Lastly, annual income from dividends pertains to income received from owning shares in a company, which is distinct from gains realized on the sale of an asset.