Glossary · Defined term
Capital gains tax
Capital gains tax is the tax on profit from selling an asset for more than its purchase price. See how cost basis and holding period come into it.
Last updated Oct 2, 2026
What it means
Capital gains tax is the tax charged on the profit you make when you sell an asset for more than you paid for it. The gain is the sale price minus your cost basis, which is generally what you paid plus any adjustments. The tax applies when the gain is realized by selling; paper gains on assets you still hold are not taxed.
Many tax systems split gains into short-term and long-term based on how long you held the asset, with longer holding periods taxed at lower rates. This is why holding periods matter to investors: the same dollar of profit can face a very different tax bill depending on timing. Selling a losing investment to offset gains elsewhere, a practice called tax-loss harvesting, is a common way to manage the bill.
Tax rules vary widely by country and change over time, so the specifics always depend on your jurisdiction. The general principle holds everywhere, though: only realized profits are taxed, and the holding period is usually the biggest lever you control.
An example
For illustration, you buy $1,000 of shares and later sell them for $1,500. The $500 profit is a realized capital gain. If the holding period qualified as long-term in your jurisdiction, that $500 would typically be taxed at a lower rate than an equivalent short-term gain.