Capital gains tax
Also called CGT
Tax on the profit from selling an investment or other asset for more than its cost, with lower rates for assets held more than one year.
What it means
When an asset such as a stock, fund or property is sold for more than its cost basis, the profit is a capital gain. Gains on assets held one year or less are short-term and taxed at ordinary income rates. Gains on assets held more than one year are long-term and taxed at lower preferential rates that depend on taxable income.
Tax applies only when a gain is realized by selling. Losses can offset gains, and net losses can offset up to $3,000 of ordinary income per year, with the rest carried forward. Homeowners can exclude a large portion of the gain on a primary residence if they meet ownership and use tests. Accounts such as IRAs and 401(k)s are not taxed on gains inside them.
Example
Suppose someone buys shares for $5,000 and sells them two years later for $8,000, a $3,000 long-term gain. At a hypothetical 15% long-term rate, the tax is $450. Had they sold within a year at a hypothetical 24% ordinary rate, it would be $720.
How it’s used
- Selling stocks, funds or real estate
- Deciding when to sell an investment
- Planning taxable brokerage withdrawals
Good to know
- Holding an asset for more than one year before selling can move the gain into lower long-term rates.
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.