Capital Gains

Capital gains are the profits you make when you sell an asset—such as stock, property, or collectibles—for more than you paid for it. The IRS taxes these profits at different rates depending on how long you held the asset.

💡Simple definition

A capital gain is the money you earn when you sell something for a higher price than you bought it. If you sold it for less, you have a capital loss.

⏰Two types of capital gains

1️⃣Short-term capital gains

Gains from assets you held for one year or less.

These are taxed at your regular income tax rates (your ordinary tax bracket).

2️⃣Long-term capital gains

Gains from assets you held for more than one year.

These receive special, usually lower, tax rates: 0%, 15%, or 20%, depending on your income.

📈What kinds of things generate capital gains?

Common examples include:

•Stocks and bonds
•Cryptocurrency
•Real estate (not your main home unless you qualify for an exclusion)
•Collectibles (cards, art, coins)
•Business assets

🧮Quick example

The scenario:

You bought stock for $1,000 and sold it a year later for $1,600.

Your capital gain:

$1,600 − $1,000 = $600 profit

Tax treatment:

✓If you held it more than one year → long-term gain (lower tax rates)

✗If you held it one year or less → short-term gain (ordinary tax rates)

📉Can capital losses help you?

Yes. Capital losses can reduce your taxes:

✓You can subtract losses from your capital gains
✓You can use up to $3,000 of extra losses to reduce ordinary income each year
✓Unused losses can carry forward to future years