What are capital gains?

Capital gains refer to the profits made from the sale of an asset when it is sold for a higher price than what it was originally purchased for. This concept is fundamental in investment as it directly impacts an investor's overall returns. When an investor buys an asset, such as stocks, real estate, or other investments, they hope to sell it later at a higher value. The difference between the sale price and the initial purchase price constitutes the capital gain.

Understanding capital gains is crucial for investors since they can have tax implications. Generally, if the asset is held for more than a year before selling, the gains may qualify for lower long-term capital gains tax rates compared to short-term capital gains, which apply to assets held for less than a year. This distinction is essential for investment strategies focused on maximizing tax efficiency.

The other options do not describe capital gains. Losses from the sale of an asset represent a different financial concept and contribute to capital losses rather than gains. Dividends are payments made to shareholders and are not linked to the profit made from selling the asset. Lastly, the income generated by an investment can include interest from bonds or rental income but does not relate specifically to the capital appreciation of the asset.