Capital gain
Also called Capital loss
The profit from selling an investment or other asset for more than its cost basis; selling for less produces a capital loss.
What it means
A capital gain is the difference between what you sell an asset for and its cost basis, which is generally what you paid plus certain costs. Until you sell, any gain is unrealized and usually not taxed. Once realized, gains on assets held for more than one year are long-term and taxed at lower rates, while gains on assets held one year or less are short-term and taxed as ordinary income.
Capital losses can offset capital gains, and a limited amount of excess loss can offset ordinary income each year, with the rest carried forward. Gains inside tax-advantaged accounts such as IRAs and 401(k) plans are not taxed when realized. Mutual funds and ETFs can also distribute capital gains to shareholders, which are taxable in a regular account.
Formula
Capital gain (or loss) = Sale proceeds − Cost basis
- Sale proceeds = amount received from the sale, net of selling costs
- Cost basis = purchase price plus certain costs, adjusted for items such as reinvested dividends
Example
Suppose someone buys shares for $4,000 and sells them three years later for $6,500. The $2,500 profit is a long-term capital gain. Had they sold within a year, it would be short-term.
How it’s used
- Figuring tax owed after selling stocks, funds, crypto or property
- Timing sales to qualify for long-term rates
- Offsetting gains with losses through tax-loss harvesting
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.