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Financial Dictionary - Capital Gain

Capital Gain

It is the increase in value produced by the difference between the purchase price and the higher sale price of units of stock in an investment fund.

How does taxation work for investment funds?

The capital gain is recorded by a series of taxes, the main tax being personal income tax (IRPF) but, despite this, it should be noted that the tax advantages of investment funds are one of their main advantages over other types of investments.

The main advantage of investment funds is that funds can be transferred without being taxed. Investment funds allow you to move from one investment to another using the transfer figure. At the time a transfer is made, there is no tax implication and it will only be taxed at the time it is finally redeemed. Until that time, the investor has total freedom to move and reinvest his money between funds without it being taxed.

In the case of share investment, it is the opposite; if we want to change the shares that make up our portfolio, we only have the option of buying or selling. The sale and subsequent purchase of shares always has a tax implication, and the corresponding capital gains or losses must be declared.

How is the gain calculated?

When calculating capital gains or losses at the time of sale, we have to compare the value of the first fund that we acquire, regardless of whether there have been subsequent transfers, with the value of the final redemption at the time of sale.

Compensation of profit and loss

If the result of the redemption is negative, these losses (capital losses) can be offset against the gains (capital gains). There is a maximum period of four years established for this and the amount offset cannot exceed 25% of the return on the investment.

There is also the possibility of offsetting the gains in investment funds against losses on the stock market caused as a result of selling shares.

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