Capital Gains
The profit realized when selling an investment or asset for more than its original purchase price.
What is Capital Gains?
Capital gains are the profits earned when selling an investment asset — stocks, bonds, real estate, or other property — at a price higher than its cost basis (original purchase price plus any improvements). Short-term capital gains apply to assets held one year or less and are taxed as ordinary income (up to 37%). Long-term capital gains apply to assets held more than one year and are taxed at preferential rates — 0%, 15%, or 20% depending on taxable income. Capital losses can offset capital gains dollar-for-dollar; net capital losses above gains can offset up to $3,000 of ordinary income annually, with excess carried forward to future years.
Example
An investor buys 100 shares of a stock at $50/share ($5,000 total) and sells them 18 months later at $80/share ($8,000). The long-term capital gain is $3,000 ($8,000 - $5,000). Taxed at the 15% long-term capital gains rate, the investor owes $450 in federal tax — compared to $660 at a 22% ordinary income rate if the shares had been held less than 12 months.