In the context of stocks, capital gains refer to the profit made from selling a security (such as a stock, bond, or mutual fund) for a higher price than its original purchase price. In other words, it’s the difference between the sale price and the original cost basis.
How Capital Gains Work
Here’s an example:
- You buy 100 shares of XYZ stock at $50 per share (cost basis: $5,000).
- Later, you sell the same 100 shares at $75 per share (sale price: $7,500).
- Your capital gain is $2,500 ($7,500 – $5,000).
Types of Capital Gains
There are two types of capital gains:
- Short-term capital gains: These occur when you sell a security within one year of purchasing it. Short-term capital gains are taxed as ordinary income.
- Long-term capital gains: These occur when you sell a security after holding it for more than one year. Long-term capital gains are generally taxed at a lower rate than short-term capital gains.
Tax Implications
Capital gains are subject to taxation, but the tax rate depends on the type of capital gain and your income tax bracket. In the United States, long-term capital gains are generally taxed at 0%, 15%, or 20% of the gain, depending on your income level.
Key Takeaways
- Capital gains are the profits made from selling a security for a higher price than its original purchase price.
- There are two types of capital gains: short-term and long-term.
- Capital gains are subject to taxation, with tax rates depending on the type of gain and your income tax bracket.
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