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What Is Capital Appreciation?

If you’re new to the financial world, it won’t take long before you hear the term capital appreciation. This term is commonly used when talking about stocks, investments, or real estate. But what is capital appreciation, and what does it mean?

Simply put, capital appreciation is when an asset increases in value. There are numerous reasons why an asset may increase in value, which we’ll touch on below. Capital appreciation is a good thing as it means your asset base is growing! 

How Does Capital Appreciation Work?

Capital appreciation, in its most simplest form, is when an asset acquired for value A has increased in value, to value B, over time. The appreciation may require effort and work on behalf of the investor/owner of the asset, or the asset’s value can also increase due to other economic factors. 

What Does Capital Appreciation Mean?

What does it mean? To fully understand this question, look no further than two of the most common forms of capital appreciation. 

  1. Imagine you purchased stocks in January with an initial investment of $10,000. In June of the same year, your stock portfolio increases to $12,000. This $2,000 increase is the capital appreciation, as your underlying asset base, stocks in this example, rose in value. 
  2. If you purchased a home in the year 2015 for $300,000 and in 2021 the value of the home is now $350,000, you will have $50,000 in capital appreciation. 

The appreciation can happen intentionally, or unintentionally. Considering the stock portfolio example above, the investor likely invested in the underlying stocks as they believed the value of those stocks would appreciate overtime. The capital appreciation was intentional. 

Whereas, in the real estate example above, the homeowner may have never purchased the home to see their home value increase $50,000 in just 6 years. Perhaps the homeowner was just looking for a place to live, and happened to purchase a home in a neighborhood/town that appreciated above and beyond the typical real estate trend. 

What Is Capital Value?

Capital value is not the same as capital appreciation. However, you need to know what the current capital value, or market value, of an asset is in order to calculate if there was any appreciation. 

So what is capital value? Simply put, capital value is the current market price of an asset. If stock ABC was purchased for $100 a share in January of 2021, and in June of 2021 the security is trading for $110 a share, the $110 share price is the capital value.

The $10 in profit is the capital appreciation. 

What Is a Capital Appreciation Bond?

A capital appreciation bond, also known as CAB, is a bond that does not pay an annual interest payment to it’s investor. Instead of paying an annual interest rate, the interest is paid when the bond fully matures and the principal is paid back.

Capital appreciation bonds typically have a higher interest rate associated with them. 

Is Capital Appreciation Taxable?

Now with a better understanding of capital appreciation, we’re left with one very important question. Is capital appreciation taxable? 

The answer is, no, it is not taxable. However, capital gains is taxable, and there are two types of capital gains to consider – short and long term capital gains. 

What’s the difference between capital appreciation and capital gains? Capital appreciation exists ‘on paper’. Consider the stock portfolio mentioned above. 

In January the investor invested $10,000 into the stock market. In June, the investor’s portfolio was valued at $12,000. The investors portfolio has increased $2,000, ‘on paper’, but the investor did not sell the stocks to cash in that profit.

In the coming months, that stock portfolio may rise to $15,000, or drop to $5,000. Capital gains is when you sell your asset, and cash in the capital appreciation.

If the investor decided to sell their stocks in June for a $2,000 profit, the investor would have paid tax on that $2,000 capital gain. The gain exists because of the appreciation, but capital appreciation by itself is not what’s taxed. 

Factors to Consider

There are numerous factors one must consider when it comes to capital appreciation. 

Time Frame

Capital appreciation can occur quickly, or it can occur gradually over time. If you were to cash in the profit you made over time, the time frame is important. 

There is both a short and long term capital gains tax. The short term capital gain tax is much higher than the long term capital gains tax. The different tax rate must be considered when making your investment decision. 

Reasons for Appreciation

There are also numerous reasons why an asset may appreciate. Here are some of the most common reasons:

With real estate, you may see capital appreciation when:

  1. An investor buys a fixer-upper, and invests money into fixing the home. When the home is updated/fixed, the asset is worth more money. 
  2. The real estate market increases. We saw this throughout the COVID-19 pandemic, but as interest rates were slashed on mortgages, the housing market saw a massive boom. There were plenty of areas that saw the home values increase 10-20% year over year. 

With the equities market, you will see capital appreciation when the underlying equities rise in value. There are numerous reasons why an equity may increase in value, including:

  1. The equity was undervalued to begin with, and now rising in value. 
  2. The company is reporting positive financial metrics and exceeding expectations. 
  3. The company is expanding, and the expansion is seen positively in the eyes of shareholders. 


Taxes must be considered when it comes to liquidating your capital appreciation and converting it to a capital gain. You’ll need to make sure you’ve reached your desired profit target with all taxes factored into the equation. 

Also it should be taken into consideration the duration of your asset’s appreciation to determine at what rate you will be paying the tax.


Capital appreciation does not necessarily produce income. Remember, capital appreciation is what the asset has increased to, on paper, but does not necessarily represent the income you generate from a given asset or the locked-in profit you’ve made. 

How to Calculate Appreciation 

All assets have the ability to appreciate, or depreciate, over time. Calculating capital appreciation can be either simple or complex depending on the underlying asset. 

For instance, if you are trying to calculate if your stock portfolio appreciated over time, you can easily get this information from your stock trading software. You can do the math manually as well, all you need to know is the number of shares purchased, how much you purchased each share for, and the current trading price per share.

The delta of what the price per share is currently vs. what it was when you purchased the stocks will be your capital appreciation or depreciation. However, calculating capital appreciation for real estate is not nearly as easy as there is no guarantee the property will sell for the full market value that gets assessed.

However, being complex doesn’t mean it’s impossible. To calculate if your property has appreciated, you can:

  • Hire an appraisal to get an appraised value of the home.
  • Calculate the comparables. For instance check to see what homes in your zip code are selling for on a price per square foot basis. If you know the square footage of your home, you can do the multiplication to see if the property value has appreciated. 

Advantages of Capital Appreciation

There are numerous benefits when an asset’s capital appreciates. These include:

  • The more assets you have, the higher your net worth is. 
  • The underlying asset value can be used as collateral on various other lending objectives. 
  • You can sell the assets, and pocket the profit – after paying tax of course. 

Disadvantages of Capital Appreciation

There are of course disadvantages to capital appreciation that must taken into consideration, such as:

  • The amount of appreciation can fluctuate. A gain is not a realized gain unless the asset is liquidated. 
  • If you did decide to liquidate the asset, you will pay capital gains tax. 
  • An asset can appreciate, or depreciate, without your control. 

Capital Appreciation Vs. Dividends

What’s the difference between capital appreciation and dividends? Consider dividends a secondary income stream whereas capital appreciation is not.

It’s important to note, capital appreciation does not equate to more cash in your pocket.

Grow Your Assets 

Building wealth is about having more assets than liabilities. Capital appreciation can impact any asset, but is most commonly in the stock and real estate market.

If you’re looking to grow your asset base, investing in the right assets is key. Remember, buying a house or a stock at the wrong time may not result in appreciation, and could actually depreciate!

Understanding what assets to invest in, and when, is where a professional financial advisor can help you. Financial advisors can not only help you find investment opportunities that will appreciate over time, they will also help you diversify your investment portfolio, and find other ways to achieve your financial goals!