A Capital Gain is the profit that results from the sale of a capital asset, such as stocks, bonds, real estate, or other investments, for a price higher than the original purchase price. In simpler terms, it is the difference between what you paid for an asset and what you sold it for, provided the sale price is higher than the purchase price.
Types of Capital Gains:
- Short-Term Capital Gains:
- These are gains on assets that are sold within one year of purchase. Short-term capital gains are typically taxed at the same rate as your ordinary income, which can be higher than the rate for long-term capital gains.
- Long-Term Capital Gains:
- These are gains on assets held for more than one year before being sold. Long-term capital gains benefit from lower tax rates compared to short-term gains, with rates depending on your income level but generally ranging from 0% to 20% in the U.S.
Example:
- If you bought a stock for \$1,000 and later sold it for \$1,500, you would have a capital gain of \$500.
Tax Implications:
- Capital gains tax is the tax imposed on the profit made from the sale of an asset. The rate of this tax depends on whether the gain is short-term or long-term, and your overall income level. Long-term capital gains typically enjoy favorable tax treatment compared to short-term gains.
Capital Losses:
- If you sell an asset for less than you paid for it, you incur a capital loss. Capital losses can be used to offset capital gains, reducing the overall tax liability.
Capital gains are a significant aspect of investment strategy, as understanding how they work can influence decisions about when to buy or sell assets to minimize tax liabilities and maximize returns.
For further details on capital gains, you can consult resources from the IRS.
