capital gains

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Capital gains refers to profits gained from the sale of capital assets. Almost everything someone owns and uses for personal or investment purposes is a capital asset. This includes a home, personal-use items like household furnishings, vehicles, or intangibles such as stocks or bonds held as investments. When you sell a capital asset, the difference between the cost in the asset (known as the adjusted basis) and the amount you realized from the sale is either a capital gain or a capital loss. If a person sells an asset at a price that is higher than the adjusted basis -the original purchase price plus additional cost to you (such as if you spent money to improve a home before selling it), this would be a capital gain because you sold the asset for more than your adjusted basis. You have a capital loss if you sell the asset for less than your adjusted basis.  Like other forms of income, capital gains are subject to income tax. The tax on capital gains only occurs when an asset is sold or “realized.” 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. To determine how long you held the asset, you generally count from the day after the day you acquired the asset up to and including the day you disposed of the asset.

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 August of 2022 by the Wex Definitions Team