What is capital gains tax?
Capital gains tax is levied on profits made from selling an investment for more than its original purchase price. The taxable amount—your capital gain—depends on both the size of the profit and how long the asset was held.
Short-term gains, from assets held for a year or less, are typically taxed at ordinary income rates. Long-term gains generally benefit from lower tax rates, making holding periods a key component of tax strategy.
Capital gains taxes can influence decisions around when to sell, how to rebalance and which investment accounts to use. In retirement accounts like traditional IRAs, these taxes are deferred until withdrawal, and in Roth IRAs, they can often be avoided entirely, thereby enhancing long-term compounding.
