What type of income is realized when a capital asset is sold for more than its purchase price?

• A. Ordinary income
• B. Capital gain
• C. Passive income
• D. Active income

Answer: (B)

When a capital asset is sold for more than its purchase price, the income generated from that sale is classified as a capital gain. This type of gain arises specifically from the increase in value of an asset that has been held for investment purposes, reflecting the profit made from the sale after accounting for its original purchase price. Capital gains are distinct from other classes of income like ordinary income, which generally refers to wages or salaries, and are typically taxed at different rates depending on how long the asset was held before the sale.

In this context, capital gains highlight the importance of investment decisions and the potential for appreciation over time, making them a crucial concept in understanding personal finance and taxation. Capital gains can either be short-term or long-term, depending on whether the asset was held for less or more than a year, which further affects the tax treatment.