Related Keywords: Capital Gains, Capital gains tax, Capital gains tax rate, Long term capital gains, Capital gains taxes
A capital gain is a profit that results from the appreciation of a capital asset from its original purchase price. If the price of the capital asset has declined this is called a capital loss. Capital gains occur in real assets, such as property, as well as financial assets, such as stocks or bonds.U.S. income tax ramifications
Under the US Tax Code's section 1222, gain or loss from sale or exchange of a capital asset is defined as a capital gain or loss. Per IRS Tax Topic 409, "Almost everything you own and use for personal or investment purposes is a capital asset. Examples of this are your home, household furnishings, and also stocks or bonds held in your personal account." If an individual person sells a capital asset for more than he or she paid for it, the gain is then taxable and must be recorded appropriately on his or her tax forms.
Short term vs. Long term
In general, appreciated capital assets that are sold after being held more than 1 year (long-term capital gain) are taxed at a maximum rate of 15%. For the sale of collectibles as well as small business stock, the capital gain rate is 28%. Appreciated capital assets sold after being held less than 1 year (short-term capital gain) will be taxed as ordinary income, which can rise up to 35% in the US progressive tax system.
Realized vs. Unrealized
Capital gains are either realized or unrealized. Realized capital gains are when the actual sale of the asset returned more money than the original purchase price. Unrealized capital gains occur when the asset has appreciated in value, but the asset has not been sold yet; the gain is thus only potential.
Currently in the United States, unrealized capital gains are not subject to income tax.
Capital loss offset
In taxation in the United States, capital gains are subject to a capital gains tax. However, if a taxpayer has suffered from capital losses in that same year, he can offset the gains with the losses and thus reduce his taxable income. If the losses exceed the gains, then up to $3,000 may be deducted in order to offset ordinary income.