What constitutes a capital gain?

A capital gain is defined as the profit that results from the sale of an asset when it is sold for a higher price than its original purchase price. This can apply to various types of assets, including stocks, real estate, and other investments. When an individual sells an asset at a price greater than what they initially paid, the difference between the sale price and the purchase price is recognized as a capital gain.

This concept is fundamental in understanding how investments generate returns, as it highlights the potential for wealth accumulation through asset appreciation. Capital gains can be short-term, if the asset is sold within one year, or long-term, if the asset is held for more than one year, impacting the tax treatment of the gain.

Other options deal with different aspects of financial returns: earnings from investment dividends refer to the income paid to shareholders, depreciation pertains to the reduction in the value of an asset over time, and interest earned on savings accounts involves the compensation paid by banks for deposits, none of which fits the definition of capital gains.