what is a capital gain 
a capital gain refers to the increase in the value of a capital asset when it is sold put simply a capital gain occurs when you sell an asset for more than what you originally paid for it almost any type of asset you own is a capital asset this can include a type of investment like a stock bond or real estate or something purchased for personal use like furniture or a boat capital gains are realized when you sell an asset by subtracting the original purchase price from the sale price the internal revenue service irs taxes individuals on gains from the sale under certain circumstances 1investopedia mira norianunderstanding capital gainsas noted above capital gains represent the increase in the value of an asset these gains are typically realized at the time that the asset is sold and are generally associated with investments such as stocks and funds due to their inherent price volatility but they can also be realized on any security or possession that is sold for a price higher than the original purchase price such as a home furniture or vehicle capital gains fall into two categories both short and long term gains must be claimed on your annual tax return understanding this distinction and factoring it into an investment strategy is particularly important for day traders and others who take advantage of the greater ease of trading in the market online realized gains occur when an asset is sold which triggers a taxable event unrealized gains sometimes referred to as paper gains and losses reflect an increase or decrease in an investment s value but are not considered a capital gain that should be treated as a taxable event for example if you own stock that goes up in price but you haven t yet sold it that is an unrealized gain 1the tax rates applied to capital gains are listed below a capital loss is the opposite of a capital gain it is incurred when there is a decrease in the capital asset value compared to an asset s purchase price 1capital gains taxshort and long term capital gains are taxed differently tax efficient investing can lessen the impact of these taxes remember short term gains occur on assets held for one year or less as such these gains are taxed as ordinary income based on the individual s tax filing status and adjusted gross income agi long term capital gains on the other hand are taxed at a lower rate than regular income the exact rate depends on the filer s income and marital status as shown below 23note that there are some caveats certain types of stock or collectibles may be taxed at a higher 28 rate and real estate gains can go as high as 25 moreover if the capital gains put your income over the threshold for the 15 rate the excess will be taxed at the higher 20 rate 1in addition certain types of capital losses are not deductible if you sell your house or car at a loss you will be unable to treat it as a tax deduction however when you sell your primary home the first 250 000 is exempt from capital gains tax that figure doubles to 500 000 for married couples 4individuals whose incomes are above these thresholds and are in a higher tax bracket are taxed 20 on long term capital gains high net worth investors may have to pay the additional net investment income tax on top of the 20 they already pay for capital gains assets eligible for capital gainsnot all investments are eligible for the lower capital gains rates the following are some assets that are and are not eligible capital gains and mutual fundsmutual funds that accumulate realized capital gains throughout the tax year must distribute these gains to shareholders many mutual funds distribute them right before the end of the calendar year 5shareholders receive the fund s distribution and get a 1099 div form outlining the amount of the gain and the type short or long term 6undistributed long term capital gains are reported to shareholders on form 2439 when a mutual fund makes a capital gain or dividend distribution the net asset value nav drops by the amount of the distribution a capital gains distribution does not impact the fund s total return 7tax conscious mutual fund investors should determine a mutual fund s unrealized accumulated capital gains which are expressed as a percentage of its net assets before investing in a fund with a significant unrealized capital gain component this circumstance is referred to as a fund s capital gains exposure when distributed by a fund capital gains are a taxable obligation for the fund s investors 8example of capital gainshere s a hypothetical example to show how capital gains work and how they re taxed let s say jeff purchased 100 shares of amazon amzn stock on jan 30 2020 at 350 per share he then decided to sell all the shares on jan 30 2024 at 833 each assuming there were no fees associated with the sale jeff realized a capital gain of 48 300 833 x 100 350 x 100 48 300 jeff is single and earns 80 000 per year which puts him in the income group 47 025 to 519 900 for individuals that qualifies for a long term capital gains tax rate of 15 2jeff should therefore pay 7 245 in tax 48 300 x 0 15 7 245 for this transaction 