taxes

capital gains

The profit earned from selling an asset for more than its purchase price.

Example

“She owed capital gains tax after selling stock she had held for three years.”

Memory Tip

You GAIN from your CAPITAL — profit from selling something worth more than you paid.

Why It Matters

Capital gains directly affect how much you owe in taxes each year, which can significantly impact your overall wealth. Understanding whether your gains are short-term or long-term is crucial because they are taxed at different rates, potentially saving you thousands of dollars in taxes.

Common Misconception

Many people believe that all capital gains are taxed the same way, but in reality, long-term capital gains (assets held over one year) receive preferential tax treatment with lower rates than short-term gains. Another mistake is thinking you only pay taxes when you sell, when in fact the tax liability is triggered at the moment of sale regardless of whether you immediately receive the cash.

In Practice

If you purchase stock for 5000 dollars and sell it two years later for 8000 dollars, you have a 3000 dollar long-term capital gain. Depending on your income bracket, this might be taxed at 0 percent, 15 percent, or 20 percent, meaning you could owe anywhere from zero to 600 dollars in federal taxes on that gain.

Etymology

Capital (wealth) + gains (profits) — profits from your wealth-producing assets.

Common Misspellings

capital gainscapitalgainscapital ganescapital gians

Related Terms

capital appreciation

More in taxes

Other taxes terms you should know

tax bracketA range of incomes taxed at a particular rate under a progre…gross incomeTotal income before any deductions, taxes, or expenses are s…tax deductionAn expense that can be subtracted from taxable income, reduc…capital gainThe profit realized from the sale of a capital asset — such …capital lossThe loss realized from the sale of a capital asset when the …tax-loss harvestingThe strategy of selling investments at a loss to offset capi…