Understanding Capital Gains: Types, Assets That Produce, How to Calculate, and Tax Rules

When you sell stocks or personal items for a higher price than when you first bought them, the profit is a capital gain. The stocks and personal items you own now are assets for future capital gains.

However, not all items, especially those used for personal interests, can generate profits. Therefore, you may need to start considering carefully before buying new items.

Here is a complete explanation of capital gains, from the types, differences with dividends, to tax regulations.

Definition of Capital Gain

Capital gain is the profit obtained from the increase in the value of an asset when it is sold. Quoting Investopedia, you can receive capital gains when the selling value is higher than the initial price when you bought the asset.

Capital gains can be received in the form of short-term profits (1 year or even less) or long-term (more than one year), provided that both must still be reported as income tax.

You must remain careful and pay attention to the value of the asset. Gains and losses from an asset that is not quickly valued or sold will result in a decrease in the value of your assets.

This is called a capital loss or loss due to a decrease in the selling value of an asset compared to the initial purchase price. Capital loss will not be included in income tax.

Types of Capital Gains

As explained, capital gains can be obtained from two types of profits, namely:

Short-term (short-term profits)

An example is the profit you get after selling shares or goods in less than a year. If you are the type of investor who is able to analyze the market and make predictions, then short-term capital gains are the best investment strategy choice.

Long-term (long-term profits)

Meanwhile, if you are the type of investor who is relaxed and focuses on future savings, this type of capital gain is right for you.

Long-term means that profits come from investments that have been owned for more than a year. Especially for those of you who do not pay attention to the capital market all the time, this type of capital gain can be developed in a duration according to your needs (investments are allowed to grow for years).

Assets That Generate Capital Gains

There are two types of assets that can generate capital gains, namely stocks and personal property. Examples of assets for both are:

• Stocks
• Bonds
• Jewelry
• Cryptocurrency
• NFTs
• Property and land
• Items in property
• Vehicles
• Collectibles/hobbies
• Art items, such as paintings and vases
• Antiques

Capital Gains vs Dividends

Capital gains and dividends are both profits earned from your investments or assets. However, they differ in the following ways, as quoted from BajajFinserv:

Type of income

Capital gain: the income is in the form of profit after selling goods. To become a capital gain, the goods sold must be more expensive than the price when they were first purchased. For example, you bought an antique motorbike for IDR 20 million in 2020, then sold it in 2024 for IDR 30 million. So, IDR 10 million is your capital gain.

Dividends: the income is in the form of profit sharing between the business and the investor. So, it can be said that the numbers will vary each month or within the investment period. Dividends from this investment also indicate the success and sustainability of the business.

When do you make a profit

Capital gain: usually the profit is only earned when the asset is sold. So, the profit will only be earned once. You can adjust market conditions and financial plans before selling assets to get capital gains.

Dividends: usually profits are shared or given to investors every quarter (3 months), per month, or per year, depending on the agreement between the business and the investor. Dividends are passive income for investors.

Tax rules

Capital gains: taxes are calculated based on the duration of the asset being stored. For example, short-term (less than 12 months), the tax imposed will be higher. While for long-term (more than one year), the tax imposed will be lower.

Dividends: taxes are calculated based on the investor's income tax.

Suitable investor types

Capital gains: types of investors who prioritize the development of asset values ​​in the future.

Dividends: types of investors who seek passive income and stable cash flow every month.

How to Calculate Capital Gains and Taxes

To calculate capital gains, you only need to use the following formula:

Asset selling price - (initial purchase price x number of products) = capital gain

Example: You started investing in gold in 2015 with an initial capital of IDR 20 million and stored it for nine years until 2024. Then, you sold the gold in 2024 and received IDR 45 million.

So with the formula above, the capital gain from the gold is:

Gold capital gain = IDR 45 million - (IDR 20 million x 1)

Gold capital gain = IDR 45 million - IDR 20 million

Gold capital gain = IDR 25 million

Then, you need to know the amount of tax imposed on the capital gain. The percentage of capital gain tax is based on the amount of asset tax in the year you sell. The capital gain tax formula is:

Capital gain x tax percentage = capital gain tax

Using the same example and the gold tax calculation of 0.25% in 2024, the calculation is:

Tax amount = IDR 25 million x 0.25% = IDR 62,500.

That is the explanation of capital gain that you should know. These benefits can be obtained in the short and long term. You can use stocks for long-term investments and valuables to receive large capital gains.

Capital gains can be your income in the future. However, Capital Gain is different from dividends because you will only receive the profit once, namely when you sell the asset.

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