Under which of the following circumstances may ‘capital gains’ arise?

1. When there is an increase in the sales of a product
2. When there is a natural increase in the value of the property owned
3. When you purchase a painting and there is a growth in its value due to increase in its popularity

Select the correct answer using the code given below:

1. 1 only
2. 2 and 3 only
3. 2 only
4. 1, 2 and 3

Explanation

Statement 1 is incorrect

• An increase in the sales of a product is related to business income or revenue and does not constitute ‘capital gains.’ Capital gains refer to the profit made from the sale of a capital asset and not regular income from business operations.

Statement 2 is correct

• A natural increase in the value of property owned, such as real estate, may lead to capital gains when the property is sold, and the profit (difference between the sale price and purchase price) is realized.

Statement 3 is correct

• Purchasing a painting and experiencing a rise in its value due to increased popularity is an example of a capital gain, provided the painting is sold, and the profit is realized.

Answer: (b) 2 and 3 only; Difficulty Level: Easy