What defines "capital gains"?

Capital gains are defined as the profits that arise when an asset is sold for a price that exceeds its original purchase price. This concept is fundamental in the world of investing and taxation, as it reflects the increase in value of an asset over time. When an investor sells an asset—such as stocks, real estate, or other forms of investment—any profit earned from that sale, assuming the selling price is higher than what was paid, is categorized as a capital gain.

This understanding distinguishes capital gains from other financial terms. For example, losses from selling an asset would be described as capital losses, not gains. Similarly, income derived from interest on investments and dividends reflects different types of returns that do not pertain to the sale price of assets but rather ongoing income from ownership. Thus, the definition provided in the correct answer captures the essence of capital gains accurately and aligns with common financial principles.