What Is "Capital Appreciation" on Investments?

Capital appreciation only accounts for the change in stock price.
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Capital appreciation, also known as capital growth, refers to the increase in the value of an investment over time. It tells you how much profit you would pay taxes on if you sold the investment that day. However, it doesn't always give you a full picture of how well the investment is performing because it doesn't include all return types.

Price Change Only

The capital appreciation on an investment includes only the increase in the value of the investment. To figure the capital appreciation, subtract your initial investment from the current value. For example, say you bought 100 shares of stock for $50 per share and they are now worth $52 each. Subtracting the initial price of $50 per share from the current value of $52 per share gives you a capital appreciation of $2 per share. To figure the total capital appreciation, multiply the $2-per-share increase by 100 to find your total capital appreciation is $200.

Tax Advantages

Capital appreciation is unrealized until you actually sell the investment, which means that until then your gain is only on paper. If the stock market were to crash tomorrow, your gains would be wiped out. Because of that risk, the Internal Revenue Service taxes you only when you actually realize a gain. For example, say you own stock that has appreciated in value by $200 since you purchased it. Because you haven't sold it, you won't owe any taxes. However, if you do sell it, you have a $200 capital gain that is all taxable in the year the stock is sold.

Other Returns

Capital appreciation doesn't include dividends, which are payments made by the company to shareholders, in the return. So, to get a better idea of how much your investments are actually returning, you must factor in dividends. For example, say you buy a stock for $50, it has grown to $52 in value and it has paid $6 in dividends. While the capital appreciation is only $2, the total return is $8 because of the $6 in dividends. You must pay taxes on any dividend in the year in which it is received.

Tax Rates

The tax rate you eventually pay on the capital appreciation when you sell the investment depends on how long you held it. If you owned the stock for a year or less, it gets added to your ordinary income and taxed at the same rate. If you owned it for more than a year, it's taxed at lower long-term capital gains rates. The maximum long-term capital gain rate is only 20 percent as of 2013. However, if your modified adjusted gross income exceeds the annual limits, you also owe the 3.8 percent investment income tax. As of 2013, the income thresholds are $200,000 if you're single, $250,000 if you're married filing jointly and $125,000 if you're married filing separately.

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