Definition:
Any positive difference between the selling price of an asset and the price at which it was originally purchased. A negative difference would indicate a capital loss. Capital gains are a special type of income which is handled and taxed differently than wages, salaries, independent contractor fees, etc. The length of time that asset is in your possession determines whether it is taxed as a long-term capital gain, which is taxed at a lower rate, or a short-term capital gain, which is taxed at the regular income rate. The actual rate paid on capital gains also depends on the owner's marginal federal tax rate. Certain exemptions apply to certain assets, such as profits on the sale of a primary home, which are tax exempt up to $250,000 for single filers and $500,000 for married couples filing a joint return. Importantly, capital gains taxes are not paid until the asset is sold, so calculations of profit on unsold assets must account for yet-to-be-paid capital gains taxes.
