What is capital gains tax?
The tax on profit when you sell an investment for more than you paid. In the US, gains on holdings over a year are taxed at 0, 15 or 20 percent; under a year, at your ordinary income rate.
Capital gains tax is the tax on the profit from selling something for more than you paid for it. Buy a stock for $1,000, sell for $1,500, and the $500 is a capital gain. Only the gain is taxed, not the whole $1,500, and only when you actually sell.
The US splits it by holding period. A short-term gain, on something held one year or less, is added to your income and taxed at your regular rate, which can be 22, 24 or 32 percent for many working people. A long-term gain, on something held more than a year, gets its own lower rates: 0 percent for lower incomes, 15 percent for most people, 20 percent for high earners. That one-year line is the single most valuable tax fact for a stock investor.
Losses offset gains. If you sold one stock for a $500 gain and another for a $300 loss in the same year, you are taxed on $200. Net losses beyond your gains can reduce ordinary income by up to $3,000 a year, with the rest carried forward.
Your broker reports every sale to the IRS and to you on Form 1099-B, with the cost basis and holding period, so the calculation is mostly done for you. Retirement accounts skip all of this; gains inside them are not subject to capital gains tax.
Informational only, not financial advice. Updated September 4, 2026.
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