Glossary
Capital Gain
A capital gain is the profit made when an investment is sold for more than its cost basis.
Federal tax treats gains on assets held more than one year (long-term) at preferential rates, while short-term gains are taxed as ordinary income. Gains inside retirement accounts are not taxed as gains at all — traditional accounts convert everything to ordinary income at withdrawal, and Roth accounts can eliminate the tax entirely.
Why it matters in practice
The hold-one-year line and the choice of which account holds which asset can change the tax on the same investment substantially. Unrealized gains — profit on paper, not yet sold — are not taxed, which is why the timing of sales is a planning decision and not just an investment one.
In California
California does not offer a lower rate for long-term gains: the state taxes all capital gains as ordinary income, at rates reaching 13.3% for top earners, which raises the stakes of gain timing for California residents.
Related terms: Cost Basis · Tax-Loss Harvesting · Dividend · Wash-Sale Rule · Tax-Deferred