Capital Gains Exposure (CGE)

What Is Capital Gains Exposure?

Capital gains exposure is an assessment of the extent to which a stock fund or other similar investment fund's assets have appreciated or depreciated. Capital gains exposure may have tax implications for investors.

Understanding Capital Gains Exposure (CGE)

Positive capital gains exposure would mean that the assets in the fund have appreciated and that shareholders will have to pay taxes on any realized gains on the appreciated assets. Negative exposure means that the fund has a loss carry-forward that can cushion some of the capital gains.

Calculated as:

Capital Gains Exposure = CGA − Loss Carryforward Current Value of Assets where: CGA = Capital Gain of Assets \begin{aligned} &\text{Capital Gains Exposure} = \frac { \text{CGA} - \text{Loss Carryforward} }{ \text{Current Value of Assets} } \\ &\textbf{where:} \\ &\text{CGA} = \text{Capital Gain of Assets} \\ \end{aligned} Capital Gains Exposure=Current Value of AssetsCGA−Loss Carryforwardwhere:CGA=Capital Gain of Assets

For example, a stock fund with a million shares currently has assets that are worth a total of $100 million. Six months ago, the assets were only worth $50 million, and the fund still has $10 million worth of losses that can be carried forward. In this case, the capital gains exposure is 40% or, in other words, if the fund manager realizes the gains, each investor will have to pay taxes on a $40 capital gain.

Capital Gain

Capital gain is a rise in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short term (one year or less) or long term (more than one year) and must be claimed on income taxes.

While capital gains are generally associated with stocks and funds due to their inherent price volatility, a capital gain can occur on any security that is sold for a price higher than the purchase price that was paid for it. Realized capital gains and losses occur when an asset is sold, which triggers a taxable event. Unrealized gains and losses, sometimes referred to as paper gains and losses, reflect an increase or decrease in an investment's value but have not yet triggered a taxable event.

A capital loss is incurred when there is a decrease in the capital asset value compared with an asset's purchase price.

Capital Gains Tax

A capital gains tax is a tax on the profit realized on the sale of a non-inventory asset that was greater than the amount realized on the sale. The most common capital gains are realized from the sale of stocks, bonds, precious metals, and property. Not all countries implement a capital gains tax, and most have different rates of taxation for individuals and corporations.

Taxes are charged by the state over the transactions, dividends and capital gains on the stock market. However, these fiscal obligations may vary from jurisdiction to jurisdiction.

In the United States, with certain exceptions, individuals and corporations pay income tax on the net total of all their capital gains. Short-term capital gains are taxed at a higher rate: the ordinary income tax rate. The tax rate for individuals on "long-term capital gains," which are gains on assets that have been held for more than one year before being sold, is lower than the ordinary income tax rate, and in some tax brackets, there is no tax due on such gains.