capital gains tax
A tax on the profit from the sale of a capital asset. Long-term gains (held over 1 year) are taxed at lower rates (0%, 15%, or 20%) than short-term gains taxed as ordinary income.
Example
“By holding the stock for 13 months instead of 11, he qualified for the 15% long-term capital gains rate instead of his 32% ordinary income rate.”
Memory Tip
Hold for over 1 year = LONG-TERM rate (lower). Under 1 year = taxed like regular income (higher).
Why It Matters
Capital gains tax directly affects how much profit you keep when selling investments like stocks, real estate, or mutual funds. Understanding the difference between long-term and short-term rates can save you thousands of dollars and influence when you decide to sell your assets.
Common Misconception
Many people believe all investment profits are taxed the same way, but the holding period matters significantly. Short-term gains are taxed as ordinary income at rates up to 37 percent, while long-term gains receive preferential treatment at much lower rates.
In Practice
If you buy a stock for 5000 dollars and sell it after 8 months for 6000 dollars, your 1000 dollar gain is taxed as ordinary income, potentially at 24 percent or higher. However, if you wait 13 months to sell that same stock at 6000 dollars, the 1000 dollar gain qualifies for long-term treatment and may only be taxed at 15 percent, saving you about 90 dollars in taxes.
Etymology
From Latin 'capitalis' (principal) + Old Norse 'gagn' (profit) + Old French 'taxer' (to charge).
Common Misspellings
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Related Terms
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