Capital Gains

Capital gains represent the increase in value of a capital asset when it is sold for a price higher than its original purchase price. These gains are realized when the asset is sold, and they are considered taxable income. Capital gains can be classified as short-term or long-term, depending on the holding period of the asset. Short-term capital gains apply to assets held for one year or less and are usually taxed at higher ordinary income tax rates. Long-term capital gains apply to assets held for more than one year and benefit from lower tax rates.

Capital gains are an important aspect of investment strategies, influencing decisions on when to buy or sell assets. Investors often aim to maximize long-term capital gains due to favorable tax treatment. However, capital losses, which occur when an asset is sold for less than its purchase price, can be used to offset capital gains, reducing the overall tax liability.

1. An investor selling shares of a stock for $1,000 more than the purchase price, realizing a capital gain.
2. A homeowner selling their property at a profit, resulting in a capital gain.
3. A business selling a piece of equipment for more than its book value, generating a capital gain.