Capital gains are calculated as selling price minus basis, a simple equation that matters for taxes and smart investing.

Capital gains math doesn’t have to feel scary. It’s really just a simple equation wearing a dress shirt: selling price minus basis. In plain terms, the gain you report comes from how much you sold something for, compared to what you originally paid (plus the costs tied to buying or improving it). If you’re exploring what you’ll see in the Intuit Academy Tax Level 1 material, this is one of the first, clearest ideas you’ll meet—and it’s a foundation that everything else builds on.

Let me explain the formula a bit more, and why it matters in real life.

What exactly is the formula?

• Capital gain equals Selling Price minus Basis.

• The choice from a multiple-choice can feel like a trick, but this one isn’t. Selling price is the amount you got when you sold the asset. Basis is what you put into it to begin with, plus certain costs along the way.

• If Selling Price is higher than Basis, you’ve got a capital gain. If it’s lower, you’ve got a capital loss. Simple in concept, but with real-world twists that matter at tax time.

A closer look at basis: what counts

Basis is more than the sticker price you paid. Here’s how it usually works:

• For most purchases, basis starts with the purchase price.

• Add any buying costs, like sales commissions or fees.

• If you made improvements to a real asset (think home improvements that add value), those costs typically increase your basis.

• For certain assets that depreciate for tax purposes (like rental property or business equipment), the basis can be adjusted downward by depreciation.

If you’re dealing with securities or investment assets, the idea is the same, but the details can get tricky. In practice, you want to keep the records that show:

• When you bought the asset

• How much you paid (including commissions)

• Any improvements or adjustments

• Any reclassifications, splits, or other corporate actions that affect cost

A quick, relatable example

Imagine you buy a vintage guitar for $800. You pay a $25 processing fee to the seller, so your initial basis becomes $825. You then put in $150 worth of upgrades (new pickups, better electronics). Your total basis is now $975.

Later, you sell the guitar for $1,200. Your capital gain is $1,200 minus $975, which equals $225. That $225 is the amount you’d use to determine your tax liability, subject to rate rules and other details.

If you had only sold it for $900, your gain would be $900 minus $975, or a $75 capital loss. Losses can offset gains in many cases, which can reduce taxes—but the rules about when and how to apply those losses vary, so it helps to know the basics.

Short-term versus long-term: a simple needle-mover

Holding period matters. If you held the asset for a year or less, many tax systems treat the gain as short-term. If you held it longer than a year, it’s typically taxed at a different, often lower rate. That’s not just trivia; it’s a real influence on planning and budgeting. A quick mental picture: long-term capital gains rates are designed to reward patient investing, while short-term gains align with ordinary income tax rates.

Why this calculation matters for tax reporting

Capital gains aren’t just a neat math trick. They feed into how you report income and pay taxes. Getting the basis right helps you:

• Report gains accurately on tax forms

• Avoid paying more tax than you owe

• Understand how much of your money is tied up in the asset itself (versus costs and upgrades)

In the U.S., for example, you’ll often see capital gains reported on forms like 8949 and Schedule D. The underlying idea is the same: your tax bill hinges on the gain or loss calculated as Selling Price minus Basis.

Common curves and catch-ups you might run into

• Missing the costs that belong in basis: It’s easy to forget about buying fees or improvements. Those numbers reduce the amount of gain, or increase the amount of loss, if you’re selling at a lower price.

• Forgetting holding period: If you only glance at the sale price, you might miss that long-term rates apply after a year. That can change a decision about selling now versus later.

• Wash sales and similar rules: If you sell a security at a loss and buy something very similar soon after, some rules can affect whether you can claim that loss right away. It’s a caveat worth knowing, especially for frequent traders.

• Basis adjustments for depreciation: If you’ve used an asset in a business or rental setting, depreciation lowers your basis over time. That changes your gain when you sell.

Connecting the dots with real life

Capital gains are part math, part story. They help you understand how much of your financial gain is tied directly to the asset’s performance versus costs you incurred to own or improve it. It’s like tracking a project’s footprint from the moment you sign the buy contract to the moment you hand over the keys or the instrument.

And there’s a practical thread here: a clear grasp of basis helps you plan. If you’re thinking about future sales, you can factor in expected appreciation and costs to estimate potential gains. This isn’t about guessing the future—it’s about making informed decisions with the numbers you have now.

Keep it simple, but don’t oversimplify

The nice thing about the core formula is its clarity. Selling price minus basis gives you the profit (or loss) on an asset. But the full story sits in the details—what counts as basis, how holding period affects tax rates, and how losses can offset gains. Those are the pieces that keep your understanding grounded and practical, whether you’re handling a personal sale or organizing a small investment portfolio.

If you’re curious about the bigger picture, a few related topics often come up next:

• Cost basis tracking for different asset classes (real estate, stock, collectibles)

• How improvements vs. repairs affect basis

• The mechanics of reporting gains on tax forms

• Strategies around timing of sales to optimize tax outcomes

Practical takeaway

• The equation you’ll use most often is Selling Price minus Basis.

• Basis includes the original cost plus buying costs and any approved improvements or adjustments.

• A positive result equals a capital gain; a negative result equals a capital loss.

• Holding period matters for tax rates; long-term gains typically carry a different rate than short-term gains.

• Keep clear records so you can calculate the gain accurately when it’s time to report.

A final nudge

Whether you’re studying concepts for a course or just brushing up on your financial literacy, the core idea is both simple and powerful. The more you practice with real numbers—using your own purchases or hypothetical scenarios—the more natural the formula becomes. And as you move through the rest of the material in this level, you’ll see how this same foundation supports more advanced topics, from cost basis adjustments to the finer points of capital gains taxation.

If you’re hunting for a mental model, here it is in one breath: track what you paid, include what you spent to get or improve it, compare that to what you sold it for, and then decide what the tax story looks like based on how long you held it. That’s the arc of capital gains in its purest form—and the heart of the calculation that powers smart financial decisions.

Want to revisit the idea with another example or explore how basis works for a specific asset you own? I’m happy to walk through it step by step and bring the numbers to life.