A capital gain is best described as the profit made during the sale of an item. This term only applies to the profit made above and beyond the original purchase price, not to the purchase price of the item itself. This capital gain is then taxed, usually in one of two ways.

Which Items Incur a Capital Gains Tax?

Capital gains taxes can come from the sale of many different non-inventory items. These can include the sale of property, precious metals, bonds or stocks. Every time an investor purchases one of these items and then sells it for a profit, that profit incurs a capital gains tax.

For example, if an investor purchases $10,000 worth of a stock and then sells it at a later date for $12,000, he then owes a capital gains tax on the two thousand dollars of profit he made from the deal. The question is at what rate are the capital gains taxed? The answer to this question can vary depending on how long the investor holds onto the commodity as there are both short-term and long-term capital gains tax rates. These rates can also vary depending on which tax bracket the investor falls into.

Short-term Capital Gains Tax

Investors who buy and sell items or properties rapidly usually pay a higher rate of capital gains tax than others. Any capital gains earned in one year or less are usually taxed at the current federal income tax rate depending on which tax bracket the investor falls into. This tax rate can vary from as low as ten percent for the lowest tax bracket to 35% for the highest. For this reason short-term investors have to be careful that their profits aren’t eaten up by their capital gains taxes.

Long-term Capital Gains Tax

Investors wishing to avoid these higher tax rates tend to go with longer-term investment strategies. This is because the capital gains tax rate for long-term profits is much lower.

For example, the tax rate for long-term investment capital gains varies from 15% for the four highest tax brackets to zero for the two lowest brackets. This long-term investment strategy may not offer the opportunities for larger returns on investment that short-term investing does, but the lower overall profit gained may be offset by the lower capital gains tax owed. In the end, investors must decide which strategy is right for them.