Capital gain, for income tax purposes, is the gain realized from sale of capital assets. The difference between the original purchase price and the sale price is the gain realized. The tax on capital gains only occurs when an asset is sold or “realized.” If the sale price is higher than the original purchase price, then the difference is a capital gain. If the sale price is lower than the original purchase price, then the difference is a capital loss. For example, if Bob buys ten shares of Stock X for $10 and then sells the ten shares for $15, Bob’s capital gain is $50.
There are two categories of capital gains: short-term and long-term. If the asset was held for one year or less, the capital gain is short-term. If the asset was held for more than one year, then the capital gain is long-term.
Different tax rates apply for long- and short-term capital gains. As of February 11, 2020, the tax rate on most net capital gain is 15% for most individuals. Net capital gain is calculated from deducting capital losses from the total of capital gains.
[Last updated in May of 2020 by the Wex Definitions Team]