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. Explore More Resources
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.