Capital Gains Tax.
A definition, in plain English — with the books that teach it.
What it means
Capital gains tax applies to profits realized from selling a capital asset — stocks, real estate, mutual funds, or other investments — for more than the purchase price. Short-term gains (assets held one year or less) are taxed as ordinary income; long-term gains (assets held more than one year) qualify for preferential rates of 0%, 15%, or 20% depending on taxable income. High earners may also owe an additional 3.8% net investment income tax (NIIT). Tax-loss harvesting, retirement accounts, and holding periods are the primary tools for managing capital gains liability.
Example
An investor bought 100 shares of stock at $40 each ($4,000 cost basis) and sold them for $9,000 after 18 months. The $5,000 long-term gain is taxed at 15% for most middle-income filers, creating a $750 tax bill — compared to potentially $1,100 if the shares had been sold within 12 months.
