Capital Gain

A capital gain occurs when a taxpayer sells a capital asset and the sales price of the capital asset exceeds the purchase price of the capital asset.

The Internal Revenue Service imposes income tax on capital gains. The amount of income tax depends on whether the capital asset is a short-term capital asset or a long-term capital asset. A short-term capital asset is one purchased and sold within one year. A long-term capital asset is one purchased and held for more than one year before it is sold.

Typically, the tax rate on short-term capital gains is higher than the tax rate on long-term capital gains. The tax rate on short-term capital gains is the same as the marginal tax rate applied to the taxpayer's other taxable income. The tax rate on long-term capital gains is typically 15 percent, although there are certain circumstances with the sale of collectibles, business stocks, and certain real property where the capital gains are taxed at 25 or 28 percent.