What Is Capital Gain | Definition, Calculation, Differences, Examples, Taxes & Key Considerations

Table of Contents

Overview

1. Definition of Capital Gain
2. How to Calculate It (costs to consider in practice)
3. How It Differs from Income Gain / Capital Loss
4. Examples (FX, Stocks, Crypto)
5. Pros and Cons
6. Tax Basics (Japan)
7. Who It Suits (general view)
8. Summary

Overview

Capital gain is the profit realized from buying and selling an asset at a higher price. It’s a foundational term used not just for stocks, bonds, funds, and real estate, but also in FX (currency gains) and crypto.

1. Definition of Capital Gain

The profit that is locked in when you sell an asset above your purchase price. It excludes income you earn while you hold an asset—such as dividends, interest, or rent—and focuses on the buy–sell price difference.

2. How to Calculate It (costs to consider in practice)

The core formula is simple.

Capital gain = Selling price − Purchase price

In practice, also factor in:

• Trading costs: commissions, exchange fees, and FX spreads, etc.
• Taxes: method and rate vary by product and jurisdiction.
• Other: slippage, FX conversion fees (when converting foreign-currency assets), etc.

3. How It Differs from Income Gain / Capital Loss

• Income gain: returns earned by continuing to hold an asset (stock dividends, bond interest, rental income, etc.).
• Capital loss: a loss on sale when the selling price is below the purchase price (same formula as gains, but negative).

In short:

Capital gain = trading profit (can be one-off and volatile)
Income gain = holding income (ongoing; can be relatively stable)

4. Examples (FX, Stocks, Crypto)

• FX (foreign exchange)
  Example: Buy USD/JPY at 150 → close at 160. The ¥10 difference per dollar is a currency gain = capital gain.
  *Remember to account for the effective fee known as the spread.
• Stocks
  Example: Buy at ¥1,000 → sell at ¥2,000. The ¥1,000 difference is a capital gain.
• Crypto
  Example: Sell Bitcoin at a price above your purchase price; the difference is your capital gain.

5. Pros and Cons

Pros

• Potential to realize larger profits over a short period (assets with bigger swings can produce wider moves)

Cons

• Losses can widen if prices move against you (the higher the volatility, the greater the swings)

These are general points. Risks vary by product features, market conditions, and whether leverage is used.

6. Tax Basics (Japan)

In Japan, capital gains from FX trading (currency gains) are generally subject to a combined tax rate of about 20.315% (income tax 15% + special reconstruction tax 0.315% + resident tax 5%). Income components such as swap points typically face the same rate.

*Tax rules can change by product, account type, personal circumstances, and law revisions. Always check up-to-date official guidance or consult a professional.

7. Who It Suits (general view)

• Those who prioritize price appreciation and can manage the associated price risk.
• Those who can build core knowledge, keep up with market conditions, and practice risk control such as limiting losses.
  (In FX especially, leverage can amplify gains and losses, so careful risk management is essential.)

8. Summary

• Capital gain = trading profit from buying low and selling high.
• It differs in nature from income gain and capital loss.
• Appears across FX, stocks, crypto, etc.—track your net P/L after costs and taxes.
• Understand both sides: potential (short-term upside) and risk (losses can expand).

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FAQ

Q1. Do unrealized gains count as capital gains?

A1. No. Capital gains refer to profits realized when you sell/close. Gains while holding are unrealized and only become P/L when realized.

Q2. Do FIFO/LIFO rules change how gains are calculated?

A2. Some products and account types have specific calculation rules. Follow your broker/exchange standards and applicable tax rules for your filing category.

Q3. Can I offset FX capital gains with stock dividends?

A3. Offsetting depends on income categories and account types. In Japan, it’s generally not possible to offset separated-self-assessed income from futures/FX against separated-self-assessed income from listed stock dividends/capital gains. Always confirm the latest tax rules.

Q4. How are crypto trading gains treated?

A4. In Japan they’re often treated as miscellaneous income and combined with other income. Rates and calculations depend on your situation—consult the latest official materials or a professional.

Q5. Should I include fees and spreads in my capital gain calculation?

A5. For an accurate picture, include all trading costs (commissions, spreads, FX conversion fees, slippage, etc.). Make sure your displayed P/L aligns with realized P/L.