Capital Gain

A capital gain is an increase in the value of an asset above its purchase price. Capital gains have special relevancy for Federal income taxes. The IRS considers almost everything you own a capital asset, and anytime you sell a capital asset above its "basis" – usually the purchase price – you have a capital gain. If you sell at a loss, you have a capital loss. If you've held the asset more than one year, the capital gain is long-term; if less than one year, it's a short-term capital gain. Capital gain taxes are determined by a formula that entails various nettings of short-term and long-term capital gains and losses. Further, a capital gain is only realized when a capital asset that has appreciated in value is sold; until the appreciated asset is sold, the capital gain is unrealized. That's important, because taxes aren't due until a capital gain is realized. Also note that a capital gain is taxed at a lower rate than ordinary income, and thus taxpayers prefer that any reportable profits be considered a capital gain.

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