What are capital gains?

Capital gains refer to the profits that investors realize when they sell an asset for more than its original purchase price. This concept is central to investing and is a fundamental component of how many investors assess the performance of their investments. When the market value of an asset, such as stocks, real estate, or other investments, appreciates over time, and the owner sells that asset at this higher price, the difference between the sale price and the purchase price represents the capital gain.

In addition, capital gains can be categorized into short-term and long-term, depending on how long the asset was held before selling. Short-term capital gains typically apply to assets held for one year or less and are usually taxed at higher ordinary income tax rates, while long-term capital gains apply to assets held for longer durations and often benefit from lower tax rates. Understanding capital gains is essential for investors, as it impacts both investment strategy and tax liability.