A capital gain is the profit earned when you sell an asset — such as a stock, bond, or real estate — for more than you paid for it. Short-term gains (held ≤1 year) are taxed as ordinary income; long-term gains (>1 year) receive preferential tax rates.
Capital Gain = Selling Price − Purchase Price
Capital Gains Tax = Gain × Applicable Tax Rate
You buy 100 shares of Microsoft at $300/share ($30,000 total) and sell them 18 months later at $420/share ($42,000). Your capital gain = $42,000 − $30,000 = $12,000. Since you held over 1 year, it's a long-term capital gain. If you're in the 15% LTCG bracket, your tax = $12,000 × 15% = $1,800. Your after-tax profit = $10,200. If you had sold after 10 months (short-term), the $12,000 gain would be taxed at your ordinary income rate — potentially 32-37%, costing $3,840-$4,440 in taxes.
The distinction between short-term and long-term capital gains is one of the most important concepts in tax-efficient investing. Short-term gains are taxed at ordinary income rates (10-37% in the U.S.), while long-term gains enjoy preferential rates of 0%, 15%, or 20% depending on your taxable income. For high earners, holding an investment just one extra day (crossing the 1-year mark) can save 17-22 percentage points in taxes on the gain.
Capital gains tax planning can add 0.5-1.5% in annual after-tax returns for active investors — which compounds dramatically over decades. Tax-loss harvesting (selling losing positions to offset gains), holding periods management, and strategic lot selection (specific identification vs. FIFO) are essential tools. A $100,000 portfolio that saves 1% annually through tax-efficient management grows to $50,000 more than a tax-inefficient portfolio over 30 years.
Capital gains also apply to real estate, cryptocurrencies, collectibles, and business interests. The primary residence exclusion allows $250,000 ($500,000 for married couples) in capital gains to be excluded from taxation upon sale of a home lived in for 2 of the past 5 years. Understanding these rules across asset classes enables holistic tax planning that can save tens of thousands over a lifetime.
Warren Buffett's Berkshire Hathaway has never paid a capital gains tax on its core holdings like Coca-Cola (KO), which Berkshire has held since 1988. The KO position cost approximately $1.3 billion and is now worth over $25 billion. By never selling, Buffett has deferred billions in capital gains taxes — money that continues compounding inside Berkshire. This "buy and hold" approach to capital gains tax deferral is one of the most powerful wealth-building strategies available.
Use specific lot identification when selling: Instead of default FIFO, identify which specific shares to sell. Selling your highest-cost lots first minimizes capital gains and taxes.
Consider charitable giving of appreciated stock: Donating shares with large unrealized gains to charity avoids capital gains tax entirely while providing a full fair-market-value deduction.
Track your cost basis meticulously: Reinvested dividends, stock splits, and corporate actions all affect your cost basis. Poor records mean overpaying taxes when you eventually sell.
Calculate Capital Gain instantly:
Try Capital Gain Calculator →What is a capital gain?
A capital gain is the profit from selling an asset for more than you paid. Buy a stock at $50, sell at $80, and you have a $30 capital gain per share. Capital gains are taxed differently depending on how long you held the asset — short-term (under 1 year) at ordinary income rates, long-term at preferential rates (0%, 15%, or 20%).
What is a capital loss?
Selling an asset for less than you paid creates a capital loss. You can use losses to offset capital gains, reducing your tax bill. If losses exceed gains, you can deduct up to $3,000 against ordinary income per year and carry forward the rest indefinitely. This strategy is called tax-loss harvesting.
Are capital gains taxed if I reinvest?
Yes. Selling creates a taxable event regardless of what you do with the proceeds. Reinvesting in a different stock doesn't defer the tax. However, within tax-advantaged accounts (IRA, 401k), you can sell and reinvest without triggering taxes. This is a major advantage of tax-advantaged accounts for active investors.