Capital Gains Tax
Capital gains tax is tax on the profit from selling an asset for more than its cost basis; rates, holding-period rules and reporting duties vary by country.
When you sell an investment for more than you paid, many countries tax the profit. That is capital gains tax. The rules differ widely: how long you held the asset, your income and where you live can all change the rate. This entry explains the general idea with US and UK examples. It is general information, not tax advice — check your own country’s rules or a qualified adviser.
- Category
- Accounting, Tax and Operations
- Reading time
- 4 min
- Also called
- CGT, Tax reporting, Trading taxes
- Updated
Capital gains tax in plain words
It is the gain that is taxed, not the full amount you receive from the sale.1 The gain is the sale price minus what the asset cost you, including allowable costs. See Profit and Loss.
In the US, assets held for more than one year produce long-term gains or losses; one year or less means short-term.2 Net short-term gains are taxed as ordinary income.2
How a capital gain is worked out, step by step
Find the cost basis
What you paid, usually including purchase costs.
Find the proceeds
What you received when you sold, minus selling costs.
Calculate the gain or loss
Proceeds minus cost basis.
Check the holding period
In the US, more than one year counts as long-term.2
Net gains and losses
Losses generally offset gains under each country’s rules.
Apply the rate
US long-term rates depend on taxable income and can be 0%, 15% or 20%.2
Worked examples
Example 1 — A simple gain
Taxable gainYou buy 100 shares at $50 and sell them at $70.
| Cost basis | 100 × $50 = $5,000 |
| Proceeds | 100 × $70 = $7,000 |
| Gain | $7,000 − $5,000 = $2,000 |
Only the $2,000 profit is the taxable gain, not the $7,000 received.
Example 2 — The holding period matters
Timing effectTwo US investors make the same $2,000 gain. One held the shares for 11 months, the other for 13 months.
| 11 months | Short-term — taxed as ordinary income |
| 13 months | Long-term — lower capital gains rates |
The same profit can be taxed differently depending on how long the asset was held.
Example 3 — Netting gains and losses
NettingDuring the year you realise $3,000 of gains and $1,200 of losses.
| Net gain | $3,000 − $1,200 = $1,800 |
Realised losses usually reduce taxable gains. Unrealised paper losses do not count. See Realized and Unrealized P&L.
Short-term vs. long-term gains (US)
| Aspect | Short-term | Long-term |
|---|---|---|
| Holding period | One year or less | More than one year |
| Tax treatment | Ordinary income rates | 0%, 15% or 20%, by income |
| Typical for | Active traders | Long-term investors |
| Records needed | Every trade | Every sale |
Why capital gains tax matters to traders
After-tax returns
What you keep is what counts.
Active trading
Frequent trades often mean short-term gains. See Day Trading.
Record keeping
Every buy and sell may need reporting. See Trading Journal.
Planning sales
Timing can change the tax owed.
Advantages and disadvantages
Advantages
- Only profits are taxed, not the full sale amount.
- Losses can usually offset gains.
- Long holding periods can qualify for lower rates in some countries.
Disadvantages
- Rules vary greatly by country.
- Short-term gains can be taxed heavily.
- Detailed records are required.
- Rates and thresholds change over time.
Going deeper
Read as far as you need. Each level builds on the one before it.
Realised vs. unrealised
Beginner
Tax generally applies when you sell. A rise in value you have not sold is usually not yet a taxable gain.
Income-based rates
Intermediate
In the US, net capital gains are taxed at different rates depending on overall taxable income, and some may be taxed at 0%.2 Thresholds are updated each year.
Different countries, different systems
Advanced
The UK taxes the profit when you dispose of an asset that has increased in value, with its own allowances and rates.1 Other countries may treat frequent trading as business income instead. Always check local rules.
Common mistakes
Taxing the whole sale amount in your head
Only the gain is taxed.
Forgetting costs
Fees can adjust the cost basis and proceeds. See Trading Fees and Commissions.
Ignoring the holding period
One day can change the rate.
Poor records
Without trade records, reporting becomes guesswork.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Capital gains tax applies to the profit, not the sale amount.
- Gain equals proceeds minus cost basis.
- Holding periods can change the rate.
- Losses usually offset gains.
- Rules differ by country — check local guidance.
Frequently asked questions
Do I pay tax if I have not sold?
Are crypto gains taxed the same way?
Is this tax advice?
Further learning
- Realized and Unrealized P&L
When a gain becomes taxable.
- Profit and Loss
Measuring results before tax.
- Trading Journal
Keeping the records you need.
- Trading Fees and Commissions
Costs that affect your gain.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- GOV.UK. Capital Gains Tax: what you pay it on, rates and allowances (opens in a new tab) Checked .
- Internal Revenue Service. Topic no. 409, Capital gains and losses (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.