| Capital Gains Capital gains tax primer | You have a capital gain when you sell a capital asset for a profit. Any asset held for investment like stocks, bonds, or real estate (as opposed to inventory or supplies that are costs of goods sold) is a capital asset. Of course you can also lose money when you sell a capital asset, incurring a capital loss. Capital gains are better than ordinary income for two reasons. First, you don't pay tax on a capital gain until you sell the asset. Normally you can choose whether to sell sooner or later, so you control the timing of your gain or loss. For example, you can decide to sell late in December or early in January, depending on which year you want to report your gain or loss. Generally speaking, you don't have that kind of choice with ordinary income, such as interest and dividends. Capital gains have another big advantage over ordinary income: they're taxed at special rates. To qualify for these rates you must have long-term capital gains. Short-term capital gain is taxed at the same rates as ordinary income. |
