Capital gain

In finance, a capital gain is profit that is realized from the sale of an asset that was previously purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, and property. (If the sale of the asset had yielded a loss rather than a profit, this loss would be called a capital loss.)

In the United States, individuals and corporations pay income tax on the net total of all their capital gains just as they do on other sorts of income, but the tax rate is lower for "long-term capital gains", which are gains on assets that had been held for over one year before being sold. The tax rate on long-term gains was reduced in 2003 to 15%, or to 5% for individuals in the lowest two income tax brackets. Short-term capital gains are taxed at a higher rate: the ordinary income tax rate. In 2013 these reduced tax rates will "sunset", or revert back to the rates in effect before 2003, which were generally 20%.

Technically, a "cost basis" is used, rather than the simple purchase price, to determine the taxable amount of the gain. The cost basis is the original purchase price, adjusted for various things including additional improvements or investments, taxes paid on dividends, certain fees, and depreciation.

Exemptions from capital gains taxes in the United States include:

• Every two years, an individual can exclude up to $250,000 ($500,000 for a married couple) of gains on the sale of their primary residence.
• If an individual or corporation realizes both capital gains and capital losses in the same year, the losses cancel out the gains in the calculation of taxable gains. For this reason, toward the end of each calendar year, there is a tendency for many investors to sell their investments that have lost value. For individuals, if losses exceed gains in a year, the losses can be claimed as a tax deduction against ordinary income, up to $3,000 per year.