What it is:
How it works/Example:
The formula for capital appreciation is:
Sale Price - Purchase Price = Capital Appreciation
Let's assume you purchase 100 shares of Company XYZ for $1 per share, and after three months the share price increases to $5. This means the value of the investment has increased from $100 to $500. Thus, the amount of capital appreciation is $400.
Taxpayers report capital gains on IRS Schedule D, but these gains are subject to different tax rates depending on whether they are short term (held under one year) or long term (held over one year).
Why it matters:
Investors should realize that capital appreciation is taxable, but only when the asset is sold. Until that point, any gains are considered unrealized and are not taxable. The IRS considers nearly every asset owned by individuals or companies as capital assets and thus subject to capital gains taxes.