What Are Capital Gains?

Capital gain is the profit you make when you sell an asset. Imagine you decide to invest in the stock market. You buy some shares of a company, let’s call it ABC Inc., at $50 each. Fast forward a year. The value of those shares has gone up to $70 each! If you decide to sell those shares, you’ve made a profit of $20 per share. That profit is what we call a capital gain.

Capital gains are essentially the profits you make from selling an asset like stocks, real estate, or even art, for more than you paid for it. However, the government wants a piece of that profit. That’s where capital gains tax comes in.

The amount of tax you pay on your capital gains depends on how long you’ve held onto the asset. If you sell it within a year of buying it, it’s considered a short-term capital gain, and you’ll usually pay taxes at your regular income tax rate, which could be higher. But if you hold onto it for more than a year, it’s a long-term capital gain, and you might qualify for a lower tax rate.

Let’s go back to our ABC Inc example. If you held onto those shares for over a year before selling them, you might pay a lower tax rate on the $20 per share profit compared to if you sold them within a year.

Tax laws can vary depending on where you live and your individual financial situation. It’s always a good idea to consult with a tax professional to understand how capital gains taxes apply to you.

Overall, capital gains are a way to make money from your investments, and understanding how they work can help you make smarter financial decisions.