What are Capital Gains?
How buying and selling investments can earn money.
Imagine you buy a rare collectible sneaker for $100. A year later, sneakerheads go wild for it, and you sell it for $200. That $100 profit? That’s a capital gain! Now, let’s break this down in stock market terms.
What Are Capital Gains?
Capital gains happen when you sell an investment for more than you paid for it. This could be stocks, real estate, or even cryptocurrency. If you buy a stock at $50 and later sell it at $80, you’ve made a capital gain of $30 per share.
Two Types of Capital Gains
Short-Term Capital Gains – If you sell an investment in one year or less, the profit is considered short-term and is usually taxed at a higher rate.
Long-Term Capital Gains – If you hold onto the investment for more than a year before selling, the profit is taxed at a lower rate, making it more favorable for investors.
Do You Always Pay Taxes on Capital Gains?
Not necessarily! If you sell investments in a tax-advantaged account like an IRA or 401(k), you might not pay capital gains taxes right away. Also, if you don’t sell your investment, you don’t owe any taxes, only realized gains (profits from selling) are taxed.
Can You Lose Money Instead?
Yes! If you sell an investment for less than you paid, that’s called a capital loss. The good news? You can use losses to offset some of your gains and reduce your tax bill.
Wrapping Up
Capital gains are like flipping an item for profit, except it’s with stocks, real estate, or other investments. Holding onto assets longer can lead to tax benefits, but smart investing is about more than just taxes… it’s about making informed decisions.
Quick Glossary
Capital Gains: Profit from selling an asset for more than you paid.
Short-Term Capital Gains: Profits from selling an asset held for one year or less, usually taxed higher.
Long-Term Capital Gains: Profits from selling an asset held for over a year, usually taxed lower.
Capital Loss: Selling an asset for less than you paid, which can offset gains for tax purposes.