Capital gain refers to the increase in value of an asset or investment – it is essentially the profit that you realize when you sell an asset for more than you purchased it for.
In trading, this is usually applied to investments such as stocks, bonds, real estate, or any other form of securities. For example, if you bought a stock for $10 and sold it for $20, you’d have a capital gain of $10.
There are two types of capital gains: short-term and long-term.
- Short-term capital gains are usually applied to assets held for less than a year before being sold. These are typically taxed at a higher rate because they’re considered as ordinary income.
- Long-term capital gains apply to assets held for more than a year before being sold. The tax rates for long-term capital gains are generally lower than short-term gains, which is designed to encourage long-term investing.
Note that capital gains are not realized until the asset is sold. If your stock increased in value, but you have not yet sold it, this is considered an unrealized capital gain. You only owe taxes on capital gains once they are realized.