What It Is:
Sale Price - Purchase Price = Gain
that this formula assumes the sale price is higher than the purchase price. If an investor sells an asset for less than he or she paid, this is called a loss.
How It Works/Example:
Let's assume you purchase 100of Company XYZ for $1 per share. After three months, the share price increases to $5. This means the value of the has increased from $100 to $500, for a gain of $400.
Why It Matters:
Gains are taxable, but only when they are realized. That is, they only become taxable when the IRS considers nearly every owned by individuals and companies as capital assets and thus subject to capital gains .is sold. Until that point, any gains are considered unrealized and are not taxable. The
year, the IRS would consider your $400 a long-term capital gain and tax it at one of several flat rates. However, if you sold the Company XYZ after just three months, the IRS would consider your $400 profit a short-term capital gain and tax that $400 at your ordinary income , which varies by several , including which state you live in, and is generally higher than the long-term capital gains tax rate. This system encourages long-term , but there are still many logical reasons an investor might want to sell an before a year has passed.report capital gains on IRS Schedule D, but these gains are subject to different tax rates depending on whether they are short-term or long-term (and in some cases depending on the type of ). In the example above, if you sold the Company XYZ after a
Some retirement vehicles, such as 401(k)s and IRAs, allow investors to buy and sell assets within these vehicles without becoming subject to capital gains tax. This tax deferral effectively gives investors a larger balance on which to compound interest or returns, with capital gains tax applying only when the investor begins to make withdrawals.
An investor's capital losses sometimes offset all or a portion of his or her capital gains, lowering the investor's tax bill. There is a limit, however, to how much the investor can offset. also that the IRS does not treat the distributions of net realized long-term capital gains, like those from a mutual fund, for example, as capital gains. The IRS treats those as ordinary dividends.