A capital gain occurs when you sell an asset for a profit. That asset could be a house, land, machinery, stock, or a bond. When that happens, the capital gains tax comes into play. Since we are discussing stocks, I’ll stick with how the tax applies to investing. You figure the capital gains tax on the difference between your “basis” in the stock and the sales price. This difference is your profit or loss. The basis is usually what you paid for the stock, however if you inherit the stock, the basis is the price of the stock on the day the owner died.
If the difference between the basis and the sales price is negative, in other words, you lost money; you have a capital loss, which you can use to offset capital gains.
There are two types of capital gains:


  • Long-term Capital Gains
  • Short-term Capital Gains

Understanding the difference is very important.