🧾 Taxes, Demystified · Lesson 6 of 8 · 8 min
Capital Gains: Tax on Your Profits
📈 Your stock went up, you sold, you feel like a genius. Then the IRS taps you on the shoulder for its cut — and how big that cut is comes down to one almost-petty detail: did you hold it 365 days, or 366?
💡 Key idea
Held ≤1 year = taxed like income. Held >1 year = much lower long-term rate. You only owe when you sell.
🧠 Why it matters
When you sell an investment for more than you paid, the profit is a CAPITAL GAIN, and it's taxed. The key: SHORT-TERM gains (held one year or less) are taxed at your regular income rate. LONG-TERM gains (held MORE than a year) are taxed at a much lower rate. Just holding past the one-year mark can dramatically cut the bill — and you owe nothing until you actually SELL.
🌍 In the real world
💡 Two investors each make $10,000 profit. One sells at 11 months (short-term, taxed like salary). The other waits to 13 months (long-term, lower rate) and keeps noticeably more — same investment, same profit, just a different holding period. The tax code literally rewards patience.
📌 Takeaways
- Profit on a sold investment = a taxable capital gain
- Held >1 year = lower long-term rate
- You owe nothing until you sell
📖 Terms in this lesson
Capital gain: The profit when you sell an investment for more than you paid.
Long-term capital gain: Profit on an investment held more than a year, taxed at a lower rate than short-term profit.
Cost basis: What you paid for an investment, used to work out your gain or loss when you sell.
✅ Test yourself
How do you get the LOWER long-term capital gains rate?
- Hold more than one year before selling
- Sell within a week
- Never sell
- Buy more shares
Answer: A · Hold more than one year before selling
Holding longer than a year qualifies the gain for the lower long-term rate.
When do you owe capital gains tax?
- Every year you hold
- Only when you sell for a profit
- When you buy
- Never
Answer: B · Only when you sell for a profit
Gains are taxed when realized — when you sell for more than you paid.
A gain on a stock held 6 months is taxed...
- At the low long-term rate
- At your regular income rate (short-term)
- Not at all
- At 0% always
Answer: B · At your regular income rate (short-term)
One year or less = short-term, taxed as ordinary income — usually higher than the long-term rate.
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