Legal Definitions - capital gain

A capital gain is the profit you make when you sell or exchange a "capital asset" for more than you originally paid for it. Capital assets typically include investments like stocks, bonds, mutual funds, real estate (such as a home or rental property), and valuable personal property like collectibles or artwork.

The amount of profit is calculated by subtracting your original cost (and any associated expenses like commissions) from the selling price. This profit is then subject to specific tax rules, which often differ from how regular income (like wages or business profits) is taxed.

There are two main types of capital gains, distinguished by how long you owned the asset:

• Long-term capital gain: This is the profit from selling a capital asset that you owned for more than one year. These gains often receive a more favorable tax treatment.
• Short-term capital gain: This is the profit from selling a capital asset that you owned for one year or less. Under current federal tax law, these gains are generally taxed at the same rates as your ordinary income.

Examples of Capital Gain:

• Selling Investment Shares: Imagine you purchased 100 shares of a technology company for $50 per share, totaling $5,000. Eighteen months later, the company's stock price has risen, and you decide to sell all 100 shares for $80 per share, receiving $8,000. Your profit from this sale is $3,000 ($8,000 selling price - $5,000 purchase price). Since you held the shares for more than one year, this $3,000 is considered a long-term capital gain.

  How it illustrates the term: The shares are a capital asset. The $3,000 is the profit realized from selling that asset, making it a capital gain. The holding period determines it's a long-term gain.

• Profiting from a Real Estate Sale: A couple buys a small plot of land for $100,000, intending to build a future retirement home. Due to unexpected job relocation, they decide to sell the land seven months later for $120,000. Their profit is $20,000 ($120,000 selling price - $100,000 purchase price). Because they owned the land for less than one year, this $20,000 is classified as a short-term capital gain.

  How it illustrates the term: The land is a capital asset. The $20,000 is the profit made from its sale, qualifying it as a capital gain. The short holding period means it's a short-term gain.

• Selling a Collectible Item: An individual purchases a rare comic book for $500. After holding it for three years, its value significantly increases due to a new movie release featuring the character. They sell the comic book at an auction for $2,500. The profit from this sale is $2,000 ($2,500 selling price - $500 purchase price). Since the comic book was held for over a year, this $2,000 is a long-term capital gain.

  How it illustrates the term: The rare comic book is a valuable personal possession considered a capital asset. The $2,000 profit from its sale is a capital gain, and because it was held for more than a year, it's a long-term capital gain.