Capital Gains

Profit made from selling an asset for more than its original purchase price.

QUICK ANSWER

Capital gains refer to the profit made when an asset is sold for more than its original purchase price. The asset can be anything of financial value including stocks, bonds, real estate, or business equipment. Capital gains are subject to taxation, and the rate applied depends on how long the asset was held before being sold.

In depth

Capital gains are categorized into two types based on the holding period. Short-term capital gains apply to assets held for one year or less and are taxed at ordinary income tax rates, which can be significantly higher. Long-term capital gains apply to assets held for more than a year and benefit from preferential tax rates, typically ranging from 0% to 20% depending on the taxpayer's income bracket. This distinction makes the timing of an asset sale a meaningful financial decision for both individuals and businesses.

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For businesses, capital gains commonly arise from the sale of property, equipment, or investments. For investors and founders, they are particularly relevant at exit events such as acquisitions or IPOs, where shares are sold and the difference between the original cost basis and the sale price determines the taxable gain. Strategic tax planning around capital gains, including the use of tax-loss harvesting to offset gains with losses, can meaningfully reduce a taxpayer's overall liability.