Capital gains.

In plain English

A capital gain is the profit you make when you sell something for more than you bought it for, usually a stock, ETF, or piece of real estate. The IRS taxes capital gains in two buckets: short-term (held one year or less) is taxed as regular income, and long-term (held more than one year) is taxed at lower rates of 0%, 15%, or 20% depending on your total income.

01Why it matters

Holding for more than a year before selling can cut your tax bill on that profit nearly in half. For most middle-income earners, long-term capital gains are taxed at 15%, while regular income from a job is often taxed at 22% or 24% federally, plus state tax in many places. The other side of the same tax bucket: capital losses offset capital gains directly, and up to $3,000 of net losses each year also offsets ordinary income, with any remainder carried forward to future years.

02The math, step by step

Long-term capital gain example. You buy 10 shares of an ETF for $1,000. A year and one day later, you sell for $1,500. That is a $500 long-term capital gain. At the 15% capital-gains bracket, you owe $75 in federal tax. Short-term capital gain example. Same purchase, same sale price, but you sell at 11 months. The entire $500 is taxed at your ordinary income rate, often 22% or 24% federally plus state tax, so the bill on the same profit lands closer to $130 than $75.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

Every figure on this page is sourced to a primary document. Tap to open the original.