What is the capital gains tax?

The capital gains tax refers specifically to the tax that is imposed on the profits realized from the sale of non-inventory assets, such as stocks, bonds, real estate, and other investments. When an individual or entity sells an asset for more than its purchase price, the profit—the capital gain—is subject to taxation. This tax is designed to tax the increase in value of the asset over time, reflecting the gain that an investor has made as a return on their investment.

The nature of capital gains taxation can vary based on how long the asset was held before selling. For instance, assets held for more than one year are often subject to long-term capital gains tax rates, which are generally lower than short-term capital gains tax rates applied to assets held for less than a year.

Understanding this tax is fundamental in personal finance and investment strategy, as it can impact decision-making related to selling assets, as well as the timing of transactions to minimize tax liabilities.