Capital gains refer to the profit that an individual or entity realizes from the sale of an asset, such as a stock, real estate, or a business, that has increased in value over time. It is calculated as the difference between the sale price of the asset and the original purchase price (also known as the cost basis).
Capital gains can be short-term or long-term, depending on how long the asset was held before it was sold. Short-term capital gains are gains on assets that are held for less than a year before they are sold, and they are taxed at the individual’s ordinary income tax rate. Long-term capital gains are gains on assets that are held for more than a year before they are sold, and they are typically taxed at a lower rate than short-term capital gains.
Capital gains can be a significant source of income for investors, and they can be used to help grow wealth over time. However, it’s important to note that capital gains are taxed, and the tax rate on capital gains can vary depending on the type of asset and the length of time it is held.
Investors can also use strategies such as tax-loss harvesting to offset capital gains and lower the overall tax bill. Additionally, tax laws and regulations change over time, so it’s important to stay informed of any changes that might affect capital gains tax rates and strategies.