When you sell an asset for more than you paid for it, the difference is your capital gain. Conversely, if you sell an asset for less than its purchase price, it is a capital loss. Capital gains can apply to investments like stocks and bonds, as well as tangible assets like real estate and cars.
Why It Matters
Understanding capital gains is critical for tax planning. Short-term capital gains (assets held for less than a year) are typically taxed at ordinary income rates, while long-term capital gains often benefit from lower tax rates, incentivizing long-term investment.