DEFINITION:
Capital gains are the profits realized when an asset is sold for more than its purchase price.
WHEN AND WHY IT’S USED:
Capital gains come into focus when an investor sells an asset, such as stocks or real estate, at a profit. They are used as a performance metric to gauge how successful an investment has been over time. Capital gains are particularly relevant during tax planning, as they can have significant implications on your overall tax liability when the gains are realized.
IMPORTANCE IN COMMUNICATION:
Communicating about capital gains with your advisor is crucial for effective tax planning and performance evaluation. It helps you understand the financial impact of selling investments and how these gains are reported for tax purposes. This clarity ensures that you’re prepared for any tax liabilities and can plan withdrawals or reinvestments accordingly.
This discussion also fosters a transparent dialogue about the timing of asset sales and the overall performance of your portfolio. Understanding capital gains can lead to informed strategies that optimize tax efficiency and improve net returns. Such conversations are fundamental to aligning your short-term actions with your long-term financial goals.
EXAMPLES IN CONVERSATION:
“How will capital gains affect my tax situation this year?”
“What strategies can we use to minimize capital gains taxes?”