What is Long Term Capital Gain? | Definition, Working, Pros and Cons

The crucial part of financial development for a person is the right investment strategy. Gaining financial prosperity without any investment is nearly impossible. Along with the investment amount, the duration of the investment also plays an important role in financial growth. There is a common say in the investment community is that a short-term investment is nothing more than a gamble and for long-term prosperity, an investor should look for long-term capital gain. In their opinion, the long term capital gain is the best way for prosperity. Let’s learn how long-term capital gain work and the advantages and disadvantages associated with it.

How does it work?

Long Term Capital Gain is a type of profit realization from asset sale that a person held over one year period. This asset can be real estate property, stock, jewellery, precious metals, stocks, or bond. The amount of capital gain is decided by the price difference between the purchase price of the asset and the sales price of the asset.

For example, if anyone purchases 1000 share of X Company at $30 and hold it for two years and after two years sell the share at $50, then the long term capital gain will be $50,000 – $30,000 = $20,000. Now the person is liable for tax on this $20,000 profit. At the end of the financial year, the investor has to declare this amount in the income tax return file.

The benefit of long term capital gain is that the government consider it a positive activity for the market. Market experts believe that it is essential for market consolidation and reduce volatility from the market. As a result, most governments around the world offer various tax incentives on long term capital gain. In most cases, the tax rates vary on the investment duration. Generally, an investor has to pay 0% to 20% on a long term capital gain.

Advantages of long term capital gain

There are many advantages associated with long term capital gain. Many professional investors believe that it is the best way for a bright financial future. A Long term capital gain enjoys various tax breaks from the government. In a financial statistic, it has been proven that exponential financial return is possible with a long term investment strategy. It also reduces volatility from the market and helps the market consolidate in a better way. The investor does not require doing micro-management his investment very often. Therefore, many people consider it a relaxed way of getting financial benefits over a long period.

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Disadvantages of long term capital gain

There are also some disadvantages associated with long term capital investment. An investor needs to lock his money for a long term on the project. For this reason, it reduces financial flexibility. Another problem with long-term investment is that a small investment it delivers less return. For this reason, many small investors avoid long term capital gain. They take more risk and approach for short term capital gain.