What is Capital Gains
Capital Gains refer to the profits realized from the sale of a capital asset, such as real estate, stocks, or bonds, when the selling price exceeds the original purchase price. The taxation of these gains is contingent on the duration for which the capital asset is held.
When a capital asset is held for one year or less, the resulting gains are categorized as short-term capital gains and are subject to ordinary income tax rates. These rates can go up to 37% for the tax year 2022. On the other hand, if the capital asset is held for more than one year, the gains are treated as long-term capital gains and are subject to a different, typically lower, set of tax rates known as capital gain tax rates. In 2022, the highest capital gain tax rate is 20%.
In summary, capital gains represent the financial gains realized from the sale of an asset, and the tax implications depend on the holding period: short-term gains are taxed at ordinary income tax rates, while long-term gains benefit from potentially lower capital gain tax rates.