Capital Gains

A capital gain is the profit from selling an asset — stock, fund shares, property — for more than you paid. The purchase price (plus certain costs) is your basis; the gain is sale price minus basis, and US tax law cares intensely about how long you held the asset in between.

Short-term gains (assets held one year or less) are taxed as ordinary income, at the same rates as wages. Long-term gains (over one year) get preferential rates — 0%, 15%, or 20% depending on income, meaningfully below most people’s wage brackets. That single distinction drives an enormous amount of investor behavior: holding a winner one extra month to cross the one-year line can cut the tax on the gain by a third or more.

Related mechanics worth knowing: gains are only taxed when realized (you sell — paper gains compound tax-deferred); realized losses offset gains and up to $3,000 of ordinary income per year (the basis of tax-loss harvesting); and inherited assets receive a stepped-up basis.

Retirement accounts opt out of this system entirely: inside a 401(k) or Roth IRA, sales trigger no capital gains tax at all — one of the quiet reasons tax-advantaged compounding beats taxable compounding (compare in the Roth IRA calculator).