When you buy something like a stock or a piece of real estate and later sell it for more than you paid, that extra money you make is called a capital gain. It’s basically a fancy way of saying you made a profit on your investment. On the flip side, if you sell it for less than what you paid, that’s called a capital loss.
Let’s say you buy a stock for $50 and sell it later for $70. You made a $20 capital gain. But if you sold it for $40 instead, you’d have a $10 capital loss. These gains and losses are important because they affect how much tax you might owe or how much you can save on taxes.
Capital gains come in two types—short-term and long-term. A short-term capital gain happens when you sell something you’ve owned for less than a year. These are usually taxed at a higher rate. Long-term capital gains are from things you’ve held for more than a year, and they usually get a lower tax rate. That’s why a lot of investors try to hold onto their investments for longer—it can save them money when they sell.
Capital losses aren’t all bad news either. If you lose money on an investment, you can sometimes use that loss to lower your taxes. For example, if you made $1,000 in gains but lost $500 on another investment, you only get taxed on the $500 you actually made.
Even though it can be exciting to make a profit on a stock, it’s a good idea to understand how capital gains and losses work. Timing your sales and keeping track of your wins and losses can help you avoid surprises when tax season comes around.
So whether you’re selling at a gain or taking a loss, it’s all part of learning how to invest smart. The key is to stay informed and always think about how each choice affects your bigger money goals.
