What Are Capital Gains Taxes?
Capital gains are the profits you make by selling an investment asset.
When you buy an investment asset, the original price you pay for it is known as the asset’s cost basis. When you sell that asset, you compare its sale price to its cost basis. If you made money, this is known as a “capital gain.” If you lose money, it’s a “capital loss.”
Unlike ordinary income, money you earn through work or by selling the product of your work, capital gains are subject to their own set of taxes.
If you sell an asset after holding it for less than a year, your capital gains will be taxed as ordinary income.
Remember, the capital gains tax rate applies only to the income that’s realized when you sell an asset. If you have a mix of earned income and capital gains, you must calculate each set of income based on its relevant tax bracket. If you have both capital gains and capital losses in a single tax year, you may deduct your losses from your gains when you calculate your taxes.
Consider consulting a financial advisor to determine how your potential gains may be classified so you can better know what to expect when taxes are due.
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