Capital Gain Explained With Real Life Examples

What is Capital Gain

Capital gain is the profit you make when you sell an asset for more than your total cost.
The basic formula is:
Capital gain = Sale proceeds minus Total cost base

• Sale proceeds are the amount you receive after deducting selling fees and transaction costs.

• Total cost base includes the purchase price, buying fees, and any capital improvements.

If you have not sold the asset, it is called an unrealized gain. Once you sell and lock in the profit, it becomes a realized gain and may be subject to tax.

Short Term vs Long Term

• Short term capital gain: Holding period less than one year, often taxed at a higher rate.

• Long term capital gain: Holding period more than one year, usually taxed at a lower rate to encourage long term investing.

Rules vary by country, so always check local tax laws.

Real Life Examples

1. Stock sale including fees

You buy 100 shares at 25 each and pay a 10 fee.
You later sell them at 33 each and pay another 10 fee.

• Cost base = 100 × 25 + 10 = 2510

• Proceeds = 100 × 33 − 10 = 3290

• Capital gain = 3290 − 2510 = 780

2. Real estate with capital improvements

You buy a house for 500000 and pay 10000 in closing costs.
You renovate the kitchen for 20000 which increases property value.
You paint the exterior for 2000 which is maintenance not improvement.
You sell the house for 620000 and pay 14000 in agent fees.

• Cost base = 500000 + 10000 + 20000 = 530000

• Proceeds = 620000 − 14000 = 606000

• Capital gain = 606000 − 530000 = 76000

3. Crypto exchange treated as a sale

You buy 1.5 ETH at 2000 each = 3000 plus 30 fee.
You later exchange all ETH into BTC when ETH is worth 3600 and pay a 36 fee.

• Cost base = 3030

• Proceeds = 3600 − 36 = 3564

• Capital gain = 534

In many countries exchanging one crypto for another is considered a taxable event.

4. Dividend reinvestment

You buy 50 ETF units at 40 = 2000.
A dividend is reinvested to buy 2 more units at 42 = 84.
You later sell 52 units at 45 with a 10 fee.

• Cost base = 2000 + 84 = 2084

• Proceeds = 52 × 45 − 10 = 2330

• Capital gain = 2330 − 2084 = 246

Dividend reinvestments increase your cost base and can reduce taxable gains.

5. Collectible item example

You buy a vintage camera for 600.
You restore it with parts costing 100.
You sell it for 1000 with a 50 fee.

• Cost base = 700

• Proceeds = 950

• Capital gain = 250

6. Foreign stock and exchange rate effect

You buy US shares for 1000 USD when the exchange rate is 1 USD = 1.6 NZD.
Cost in NZD = 1600 plus 20 fee = 1620.
You sell later for 1200 USD when the exchange rate is 1 USD = 1.5 NZD and pay a 20 fee.

• Proceeds = 1200 × 1.5 − 20 = 1780

• Capital gain = 1780 − 1620 = 160 NZD

Exchange rate changes can increase or reduce gains even if the asset price has not moved much.

Using Capital Losses

Losses can often be used to offset gains in the same tax year. Remaining losses may be carried forward to future years. Selling underperforming assets for this purpose is called tax loss harvesting. Be careful of rules that restrict immediately buying the same asset again.

Items that form the cost base

• Purchase price

• Buying fees and transaction taxes

• Capital improvements such as renovations or upgrades

• Selling fees and costs are usually deducted from proceeds

Checklist before selling

1. Confirm if holding period is short or long term
2. Calculate expected gain including all fees
3. Check if you have other assets with losses to offset
4. Keep all receipts and records

Checklist after selling

1. Save contract notes and proof of fees
2. Keep receipts of improvements
3. Set aside cash to pay any potential tax

Common mistakes

• Forgetting to include broker fees

• Treating regular maintenance as capital improvement

• Assuming the main home is always tax free

• Confusing dividends or interest with capital gain

• Thinking unrealized gains are already taxable

Quick summary

Capital gain is the profit when you sell assets like stocks, homes, or crypto for more than you paid.
The cost base is critical because it determines your true gain.
Holding period matters for tax.
Losses can sometimes reduce your tax bill.
Detailed records protect you from mistakes.

Capital gain illustrated with stocks and homes

Disclaimer: Tax rules differ by country and change frequently. This post is for general information only and is not tax advice. Always consult a qualified advisor before making financial decisions.