What Is Capital Gains Tax?
Capital gains tax is tax on the profit you make when you sell an investment for more than you paid. You only owe it when you sell, not while you hold.
A simple example
You buy shares for $1,000 and sell them for $1,500. Your capital gain is $500. That $500 is what gets taxed, not the full $1,500.
Short-term vs long-term (US)
- Short-term: held one year or less. Taxed like normal income, often at a higher rate.
- Long-term: held more than one year. Taxed at lower special rates.
Rules and rates differ by country. This page describes the US in simple terms; check local rules or a tax professional.
Ways to pay less
- Hold investments longer than a year.
- Use tax-advantaged accounts like a 401(k) or Roth IRA.
- Sell losing investments to offset gains, known as tax-loss harvesting.
Related terms
Roth IRAA US retirement account with tax-free growth.
401(k)A US retirement account through your job.
Buy and holdBuying good investments and keeping them for years.
Day tradingBuying and selling within the same day.
RebalancingResetting your mix back to plan.
DividendCash a company pays its owners.