Capital Gain
Explanation: A capital gain is the profit that results from the sale of an asset, such as stocks, bonds, or real estate, for more than its purchase price. Capital gains are classified as short-term (assets held for one year or less) or long-term (assets held for more than one year). Long-term capital gains are usually taxed at a lower rate than short-term gains.
Example: An investor buys 100 shares of a stock at $50 per share, totaling $5,000. Later, they sell the shares for $70 each, totaling $7,000. The capital gain is $2,000 ($7,000 – $5,000). If the shares were held for more than a year, this would be a long-term capital gain.
Reference Link: For more information on capital gains, visit Investopedia’s Capital Gain.
FAQs:
- What is the difference between short-term and long-term capital gains?
- Short-term capital gains are realized from assets held for one year or less and are taxed as ordinary income, while long-term capital gains come from assets held for more than a year and are taxed at a lower rate.
- How are capital gains taxed?
- The tax rate depends on the holding period of the asset and the investor’s tax bracket, with long-term gains generally taxed at lower rates.
- Can capital losses offset capital gains?
- Yes, capital losses can offset capital gains, and if losses exceed gains, up to $3,000 can be deducted from other income annually, with excess losses carried forward.
- Are capital gains only applicable to stocks?
- No, capital gains can occur on any asset sale, including real estate, bonds, mutual funds, and collectibles.
- How can investors minimize capital gains tax?
- Strategies include holding investments for more than a year, tax-loss harvesting, and investing in tax-advantaged accounts like IRAs or 401(k)s.