Capital Gains
The profit from selling an asset for more than you paid, taxed at a lower rate if you held it longer than a year.
What Capital Gains means
A capital gain is the difference between what you sell an investment for and your cost basis — generally what you paid, plus commissions and certain adjustments. It is only realized, and only taxable, when you actually sell.
Holding period drives the tax rate. Assets held one year or less produce short-term gains taxed as ordinary income at your marginal rate. Assets held longer than a year produce long-term gains, taxed at preferential rates that for most filers are 0%, 15%, or 20%.
That gap is substantial and is one of the strongest arguments for a buy-and-hold approach in taxable accounts. Gains inside a 401(k) or IRA are not taxed as they occur at all.
Capital losses offset capital gains, and up to $3,000 of net loss per year can offset ordinary income, with the remainder carried forward.
Related terms
Cost Basis
What you originally paid for an investment, adjusted over time — the figure your taxable gain or loss is measured against.
Capital Loss
The loss from selling an investment for less than you paid, which offsets capital gains and up to $3,000 of ordinary income a year.
Tax-Loss Harvesting
Deliberately selling losing investments to realize losses that offset taxable gains and a limited amount of ordinary income.
Wash-Sale Rule
An IRS rule disallowing a capital loss if you buy a substantially identical security within 30 days before or after the sale.
Marginal Tax Rate
The rate applied to your next dollar of income — the number that matters for almost every tax decision at the margin.
Tax Bracket
An income range taxed at a particular rate — only the income inside that range is taxed at it, not your whole salary.
Dividend
A share of a company's profits paid out to shareholders, usually in cash and usually every quarter.
Run the numbers
Income Tax Calculator (Federal Brackets)
Estimate your U.S. federal income tax, marginal and effective rates, and take-home pay — with a bracket-by-bracket breakdown of how your income is taxed.
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