Capital gain is a tax concept that refers to income realized by selling or disposing of a “capital asset” – generally, property held for investment, such as stock or real estate – at a price in excess of the seller’s tax basis in the asset. Tax basis generally corresponds to the original amount paid for the capital asset, subject to adjustment in certain circumstances. For example, if a shareholder purchases a capital asset (e.g., stock) for $10 and sells the stock for $120, that shareholder has $110 of capital gain. Capital gains are distinct from “ordinary” income, such as interest, royalties and compensation for services. For individuals, the US federal income tax rate applicable to capital gains currently depends on how long the taxpayer has held the capital asset before selling it: capital assets held for one year or less are taxed at the “short-term” rate – which is typically the same as the rate applicable to ordinary income – while assets held for more than one year qualify for the lower, “long-term” rate. Note that US state, local or foreign tax treatment of capital gains may be different from the US federal tax treatment described above. For example, many US states tax capital gains and ordinary income at the same rates.

Last reviewed: October 25, 2022