A capital gain is an increase in the value of an investment (such as stocks or shares in a mutual fund or exchange-traded fund) or real estate holding from the original purchase price. If the value of the asset increases, you have a capital gain and you need to pay tax on it.
Capital gains can be “realized” or “unrealized.” A realized capital gain occurs when you sell the investment or real estate for more than you purchased it for. An unrealized capital gain occurs when your investments increase in value, but you haven’t sold them. The good news is you only pay tax on realized capital gains. In other words, until you “lock in the gain” by selling the investment, it’s only an increase on paper.
A capital loss occurs when the value of your investment or real estate holding decreases in value. If the current value of the investment or holding is less than the original purchase price, you have a capital loss. Capital losses can be used to offset capital gains and reduce the overall tax you will pay. You can carry capital losses back 3 years or forward into future years.
In Canada, 50% of the value of any capital gains are taxable. This means the amount of additional tax you actually pay will vary depending on how much you’re making and what other sources of income you have