What is a ‘Capital Gains Tax’

A capital gains tax is a type of tax levied on capital gains, profits an investor realizes when he sells a capital asset for a price that is higher than the purchase price. Capital gains taxes are only triggered when an asset is realized, not while it is held by an investor. To illustrate, an investor can own shares that appreciate every year, but the investor does not incur a capital gains tax on the shares until he sells them.

BREAKING DOWN ‘Capital Gains Tax’

Most countries’ tax laws provide for some form of capital gains taxes on investors’ gains, although laws vary from country to country. In the United States, individuals and corporations are subject to capital gains taxes on their annual net capital gains.

Net Capital Gains

Net capital gains refers to the total amount of capital gains minus any capital losses. This means if an investor sells two stocks during the year, one for a profit and an equal one for a loss, the amount of the capital loss on the losing investment counteracts the capital gain from the winning investment. As a result, the taxpayer has 0 net capital gains, meaning he does not incur any capital gains tax.

Capital Gains Tax Rates

The Internal Revenue Service (IRS) taxes capital gains at different rates than other types of income. As of 2015, most taxpayers pay a 0…