taxes

capital gain

The profit realized from the sale of a capital asset — such as stocks, real estate, or bonds — when the selling price exceeds the purchase price.

Example

“Buying a stock at $50 and selling it at $80 results in a $30 capital gain.”

Memory Tip

Capital GAIN = the gain (profit) on your capital (investment).

Why It Matters

Capital gains affect how much you owe in taxes each year, which directly impacts your overall investment returns and net wealth. Understanding the difference between short-term and long-term capital gains helps you plan your investment sales strategically to minimize your tax burden.

Common Misconception

Many people believe that all investment profits are taxed the same way, but capital gains are actually taxed differently depending on how long you held the asset. Long-term capital gains typically receive preferential tax treatment with lower rates than ordinary income, while short-term gains are taxed as regular income.

In Practice

If you buy a stock for 5000 dollars and sell it two years later for 7000 dollars, you have a capital gain of 2000 dollars. Depending on your income level and tax bracket, you might owe 200 to 300 dollars in taxes on that gain, but if you had sold it within one year, the tax could have been significantly higher.

Etymology

From Latin 'capitalis' (of the head, principal) + Old Norse 'gagn' (benefit, profit).

Common Misspellings

capital ganecapitalgaincapital gainn

Related Terms

capital loss cost basis

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