Portfolio · Investing Glossary
What Is Capital Gains?
The profit earned when an investment is sold for more than its original purchase price.
The Full Definition
A capital gain is the profit realized when you sell an investment for more than you paid for it (cost basis). Gains are taxed differently depending on how long you held the asset: short-term gains (held one year or less) are taxed as ordinary income, while long-term gains (held more than a year) qualify for lower tax rates — 0%, 15%, or 20% depending on income. This difference is a powerful incentive to hold quality investments for at least a year before selling, and it's a key reason buy-and-hold investing tends to be more tax-efficient than frequent trading.
Real-World Example
An investor who buys a stock for $5,000 and sells it 18 months later for $8,000 has a $3,000 long-term capital gain, taxed at the lower long-term rate. If they'd sold after only 8 months, that same $3,000 gain would be taxed as ordinary income instead.
Related Terms
- Cost BasisThe original purchase price of an investment, used to calculate gains or losses.
- Tax-Loss HarvestingSelling an investment at a loss to offset capital gains and reduce your tax bill.
- Total ReturnInvestment performance including both price appreciation and income (dividends/interest).
- Tax LotA specific batch of shares purchased at the same time and price, tracked separately for tax purposes.