Introduction to Capital Gains and Losses

2533 Words10 Pages
1. Introduction to Capital Gains and Losses

Nearly everything that you own, whether it is for investment purposes or personal use, is a capital asset. Capital assets are stocks or bonds held for investment purposes, land, machinery, etc. When an individual sells a capital asset, the difference between the asset’s purchase price and the amount that it is sold for, is either a capital gain, which is in the case if the selling price exceeds the purchase price, or a capital loss, where the purchase price exceeds the selling price.
When the value of the capital asset increases beyond the price that it was initially purchased for, that is a capital gain. The gain is not realized immediately, because the holder of the asset has not sold it. Once the individual sells the capital asset, at that point, the individual must realize the gain and must claim it on income taxes. (http://www.investopedia.com/terms/c/capitalgain.asp).
Capital gains and losses are categorized into two categories: long-term and short-term. If the asset is held for one year or more before the disposition of the asset, the capital gain or loss is considered a long-term. If the asset is held for less than one year prior to the disposition, the capital gain or loss is considered short-term. (http://www.irs.gov/taxtopics/tc409.html).

2. How Capital Gains are taxed: Holding Period

The taxation of capital gains is treated differently depending on whether your investment is considered long-term or short-term. The
Open Document