Capital Gain

What is a capital gain?

A capital gain is the profit realized when you sell a capital asset for more than its purchase price. Capital assets include investments (stocks, bonds, mutual funds, real estate) and many personal possessions (furniture, vehicles). A gain is realized only when the asset is sold; increases in value while you still own the asset are unrealized and not taxable.

Short-term vs. long-term

Short-term capital gain: realized on assets held one year or less. Taxed as ordinary income at your regular tax rate.
Long-term capital gain: realized on assets held more than one year. Generally taxed at lower rates (0%, 15%, or 20%), depending on taxable income and filing status.

How capital gains are taxed

Short-term gains: taxed at ordinary income rates.
Long-term gains: taxed at preferential rates (0%, 15%, or 20% in most cases). The exact bracket depends on taxable income and filing status.
Some assets are taxed at different rates: collectibles may be taxed up to 28%, and certain real estate gains (e.g., depreciation recapture) can be taxed at higher rates (up to about 25% in some cases).
High‑income taxpayers may owe an additional net investment income tax on top of capital gains taxes.

Special rules and limitations

Unrealized gains are not taxable until the asset is sold.
Capital loss: occurs when an asset is sold for less than its purchase price.
Some capital losses are not deductible (for example, losses on personal-use property such as the sale of a personal car or home at a loss generally cannot be claimed).
Home-sale exclusion: when you sell your primary residence, up to $250,000 of gain ($500,000 for married couples filing jointly) may be excluded if you meet ownership and use tests.

Eligible and ineligible assets for preferential rates

Eligible for long-term rates: most stocks, bonds, mutual fund shares, and real estate owned for more than one year.
Not always eligible for the lowest rates: collectibles and certain real estate-related gains are often taxed at higher rates.

Capital gains and mutual funds

Mutual funds that realize gains during the year must distribute those gains to shareholders, often near year-end.
Shareholders receive tax forms (e.g., Form 1099-DIV) reporting short- and long-term capital gain distributions.
When a fund distributes gains, its net asset value (NAV) typically drops by the distribution amount; the distribution is still a taxable event for investors.
Before investing, check a fund’s unrealized accumulated capital gains (capital gains exposure) — large hidden gains can result in taxable distributions to new shareholders.

Example

An investor buys 100 shares of a stock at $350 on Jan. 30, 2020, and sells all 100 shares at $833 on Jan. 30, 2024.
– Purchase cost: $350 × 100 = $35,000
– Sale proceeds: $833 × 100 = $83,300
– Capital gain: $83,300 − $35,000 = $48,300 (long-term)
If the investor’s taxable income places them in the 15% long-term capital gains bracket, tax owed on the gain would be $48,300 × 15% = $7,245.

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Net capital gain

A net capital gain is the amount by which your net long-term capital gain (long-term gains minus long-term losses and any carried-over losses) exceeds your net short-term capital loss. Net capital gains may qualify for lower tax rates than ordinary income.

Reducing capital gains tax on a home

Live in the home for more than two of the five years before the sale to qualify for the primary-residence exclusion.
Keep receipts for capital improvements (these increase your cost basis and reduce taxable gain).

Key takeaways

Capital gains are realized profits from selling assets for more than their purchase price.
Holding assets more than one year generally produces long-term gains taxed at lower rates.
Certain assets and situations (collectibles, some real estate gains, fund distributions) have special tax treatments.
Capital losses and exclusions (such as the home-sale exclusion) can reduce taxable gains; tax-conscious investing and timing of sales can help manage tax liability.