Finance term
Capital Gain
Also known as: capital gains, short-term capital gain, long-term capital gain
Definition
A capital gain is the profit realized when you sell an asset for more than its original purchase price (cost basis). Short-term capital gains (assets held ≤ 1 year) are taxed as ordinary income. Long-term capital gains (assets held > 1 year) are taxed at preferential rates of 0%, 15%, or 20%, depending on your income.
Detailed explanation
Capital gains taxation is governed primarily by Internal Revenue Code §1221–§1231. The tax treatment depends on two factors: the type of asset and how long you held it before selling.
Short-term capital gains (holding period ≤ 1 year) are included in ordinary income and taxed at your marginal rate — up to 37% for high earners in 2024. Long-term capital gains (holding period > 1 year) qualify for preferential rates: 0% for taxpayers in the 10–15% brackets, 15% for most middle-income filers, and 20% for filers in the 37% bracket. An additional 3.8% Net Investment Income Tax (NIIT) applies to high-income filers (modified AGI over $200,000 single / $250,000 joint) on investment gains, dividends, and other net investment income.
For real estate, special rules apply: a primary residence exclusion allows individuals to exclude up to $250,000 ($500,000 married filing jointly) of capital gains if they lived in the home for 2 of the last 5 years (IRC §121). The IRS Publication 550 and Publication 544 cover capital gains in detail.
The difference between short- and long-term treatment creates the holding period strategy: waiting one day past one year can shift a gain from ordinary income rates to long-term rates — a significant tax optimization for larger gains.
◈ Worked example
- Buy stock at $40, sell at $70 after 8 months = $30/share short-term gain, taxed at ordinary income rates (up to 37%).
- Buy stock at $40, sell at $70 after 13 months = $30/share long-term gain, taxed at 15% for most middle-income filers.
- Sell a primary residence with $400,000 in appreciation after 3 years of ownership: $250,000 excluded ($400k - $250k exclusion = $150k taxable for a single filer).
Common questions
The most-asked questions about Capital Gain — answered straightforwardly.
What is a capital loss and can it offset gains? +
A capital loss occurs when you sell an asset below its cost basis. Capital losses can offset capital gains dollar-for-dollar. Net losses up to $3,000 can be deducted against ordinary income annually; excess losses carry forward indefinitely. This is called tax-loss harvesting when done strategically.
What is cost basis? +
Cost basis is your original purchase price plus any commissions or fees paid, adjusted for stock splits or dividends reinvested. Accurate cost basis records are your responsibility — brokers report it on Form 1099-B.
Further reading
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