Investing & Markets

What is Capital Gain?

A capital gain is the profit you make when you sell an asset for more than you paid for it. An asset's value appreciation is considered an 'unrealized' gain until it is sold, at which point it becomes a 'realized' gain subject to taxation.

Capital gains are divided into short-term and long-term based on the holding period. Short-term capital gains apply to assets held for one year or less and are taxed as ordinary income. Long-term capital gains apply to assets held for more than one year and are taxed at lower rates (0%, 15%, or 20%).

Under IRS rules, capital gains can be offset by capital losses (selling assets at a loss), a strategy known as tax-loss harvesting. Realized capital gains must be reported on tax returns, making tax optimization a key consideration in portfolio management.

Quick Facts

Tax TriggerTriggered upon the realized sale of the asset for a profit

Short-Term HoldingOne year or less, taxed at ordinary income rates

Long-Term HoldingMore than one year, taxed at preferential rates (0%/15%/20%)

Loss OffsetsAllows up to $3,000 in excess capital losses to offset ordinary income

PRACTICAL EXAMPLE

An investor purchases shares of stock for $5,000. After holding them for 18 months, they sell the shares for $8,005. The investor realizes a $3,000 long-term capital gain, which is subject to a 15% tax rate ($450) for most income brackets.

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RELATED TERMS

Learn More Key Concepts

StockA financial security representing a fractional share of ownership in a corporation, conveying voting rights and claims on assets.

DividendA distribution of a portion of a corporation's earnings to its shareholders, typically paid in cash or additional shares.

YieldThe income return on an investment, expressed as an annual percentage based on the asset's cost or market value.

P/E RatioA valuation ratio calculated by dividing a company's current share price by its earnings per share.

Compound InterestInterest calculated on both the initial principal and the accumulated interest of prior periods, driving exponential growth.

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