Capital Gain

What it means

When you buy an asset like company stock, the amount you paid is called your basis. If you sell that stock later for a higher price, the profit you made is your capital gain. The government taxes these gains differently depending on how long you owned the stock.

If you held the stock for more than one year, it is a long-term capital gain, which is often taxed at lower rates. If you held it for one year or less, it is a short-term capital gain, which is taxed at the same rate as your regular wages. A tax professional can help if you are unsure about your specific situation.

A simple example

Imagine Sarah buys 10 shares of company stock for $100. A year and a half later, she sells them for $200. Because she held them for over a year, she has a long-term capital gain of $100. If she had sold those same shares after only six months, that $100 profit would be a short-term capital gain, and she would pay a higher tax rate on it.

Why it matters to you

• Holding your stock for more than one year can lower your tax bill significantly.
• If you sell your stock for less than you paid, this is a capital loss. You can use this loss to reduce the tax you owe on your gains.
• If your total losses are more than your gains, you can use up to $3,000 of that loss to reduce your regular income tax each year.

Common mistakes to avoid

• Forgetting to report the sale of stock on your taxes, even if you did not make a profit.
• Selling stock too soon without considering how much higher your tax bill might be at the short-term rate.
• Losing track of your original cost basis, which makes it hard to calculate your exact profit.

Words used on this page

• Basis (Cost Basis): The original price you paid to buy your stock.
• Capital Gain: The profit earned from selling an asset for more than its original cost.
• Ordinary Income: Money you earn from sources like your regular salary or wages, which is taxed at standard rates.
• Asset: Something of value that you own, such as company stock.