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Capital Gains Tax

Capital Gains Tax is a tax levied on the profit (capital gain) made from the sale of an asset, such as stocks, bonds, or real estate, when the selling price exceeds the original purchase price. The tax applies only to the gains, not the entire selling price. Capital gains taxes are categorized as short-term (for assets held for one year or less) or long-term (for assets held for more than a year), with long-term capital gains generally taxed at a lower rate to encourage long-term investment.

Example

An investor buys shares in a company for $1,000 and sells them later for $1,500, making a $500 profit. The $500 gain is subject to capital gains tax, which will depend on whether the gain is short-term or long-term.

Key points

• Capital Gains Tax applies to the profit from selling an asset at a higher price than its purchase price.

• Long-term gains (from assets held for over a year) are typically taxed at a lower rate than short-term gains.

• Exemptions or deductions may be available depending on the asset and the jurisdiction.

Quick Answers to Curious Questions

Short-term capital gains (assets held for a year or less) are taxed at ordinary income rates, while long-term capital gains (held for more than a year) are taxed at lower rates.

Yes, some jurisdictions provide exemptions or deductions, such as on primary residences or small capital gains below a threshold.

Capital gains tax is usually due in the tax year when the asset is sold, and the profit is realized.