Capital Gains
Definition
The profit you make when you sell an investment for more than you paid. If you bought a stock for $100 and sold it for $150, your capital gain is $50. The tax rate depends on how long you held it — less than a year is short-term (taxed like income), more than a year is long-term (lower tax rate).
Why It Matters
Long-term capital gains get preferential tax treatment. Tax brackets are 0%, 15%, or 20% versus your ordinary income tax rate (up to 37%). Holding investments longer than a year can save you thousands in taxes. This is another reason time horizon matters in investing.
Example
Buy a stock for $10,000, sell it after 18 months for $15,000. Gain: $5,000. If you're in the 24% income tax bracket, long-term capital gains tax is 15%, so you owe only $750. Short-term would owe $1,200.