What Is a Capital Gain?

What Is a Capital Gain?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A capital gain refers to a rise in the value of a capital asset, such as an investment or real estate, that gives it a higher worth than the purchase price. It is not realized until the asset is sold. A capital gain may be short-term (one year or less) or long-term (more than a year) and must be claimed on income taxes.

Related Questions

1. How does a capital gain affect my taxes?

A capital gain is considered taxable income. Depending on whether it’s short-term or long-term, different tax rates may apply. Short-term gains are taxed as ordinary income, while long-term gains have preferential tax rates. In the U.S., this is typically 0%, 15%, or 20%, depending on your income.

2. How can I reduce my capital gains tax?

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There are several strategies that can be used to reduce capital gains taxes, including holding on to investments for more than a year to qualify for long-term capital gains, offsetting capital gains with capital losses, and investing in tax-advantaged accounts.

3. What do we mean by capital loss?

A capital loss occurs when the selling price of a capital asset is less than the buying price. This loss can be used to offset capital gains, thus reducing your taxable income.

4. What is the difference between capital gains and dividends?

Capital gains and dividends are both ways to earn money from an investment. Capital gains arise when you sell an investment for more than you paid for it. On the other hand, dividends are shares of a company’s profit paid out to shareholders.

5. Can I reinvest my capital gains to avoid paying taxes?

You may be able to reinvest capital gains into certain qualified opportunity zones to defer and possibly reduce capital gains taxes. However, the rules governing this are complex and it is advisable to consult with a tax professional.