Summary: Capital appreciation is an increase in the price or value of assets. It may refer to appreciation of company stocks or bonds held by an investor, an increase in land valuation, or other upward revaluation of fixed assets. Capital appreciation may occur passively and gradually, without the investor taking any action. It is distinguished from a capital gain which is the profit achieved by selling an asset.
Capital is generally considered to be the money or items a business uses to make their products, so capital appreciation is when that capital itself rises in value. Most assets are consumed by the process of making products or providing services, but some assets can gain value while a business holds them.
Assets that Increase in Value
Investment securities, real estate, land, property, equipment and other fixed assets can increase in value over time with no additional value addition by the owner of these assets. When this happens, the capital is said to be appreciated. This is not profit per se, as the company or the investor has not yet sold the asset to realize the gain.
In certain cases, a significant enough increase in the book value of assets can cause the company to revalue the assets on the books. In this case, “marking to the market” may result in an accounting profit that is recorded on the company profit and loss statement.
Taxation on Capital Appreciation
Capital appreciation in itself is not a taxable event. Capital gains, that is when the appreciated capital is sold and the profits are realized, is a taxable event in most tax regimes.
Dividends and interest are different from capital appreciation, and are often treated as income. Taxation of those items is imposed based on the idea that they are income due to the ownership of the asset, where appreciation does not provide income.