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