A1.8.2. Capital Gains and Losses
The tax term for a profit made by selling an investment is a capital gain. The term comes from the fact that the money you put into the investment, or capital, experienced an increase (gain) in its value compared to its purchase price.
Capital gains are a favorable form of investment earnings and are typically taxed at a lower rate than ordinary earned income (wages, business income, etc.).
If you own a security for one year or less, the IRS considers the gain/loss to be short-term, and if you own the security for over one year, the IRS considers a gain/loss to be long-term. Short-term gains are taxed at the taxpayer’s ordinary income tax rate, while long-term gains are taxed at a lower rate (0%, 15%, or 20%, depending on your income). According to the IRS, the holding period clock begins the day after the investment is purchased and ends on the day the investment is sold. The date of purchase and sale are the trade dates, rather than the settlement dates. If an investor bought a security on January 5, 2022, and sold it on January 5, 2023, it would be considered a short-term gain/loss because it would h