What are capital gains?

Capital gains refer specifically to the profit realized from the sale of an asset when the selling price is higher than the purchase price. This can apply to various types of investments, including stocks, real estate, and other tangible assets. The concept is crucial in personal finance because understanding how capital gains are taxed and how they affect one's overall investment strategy can significantly impact financial planning and net worth.

For example, if an individual buys shares of stock for $1,000 and later sells them for $1,500, the capital gain is $500. This distinction is important as it affects how individuals report income and plan for taxes, since capital gains can be subject to different tax rates compared to ordinary income or losses. Understanding capital gains is essential for effective investment management and realizing the full benefits of one's investment portfolio.