Understanding Capital Gains
A lot of investing-related language can be straight-up confusing. This can make ownership seem scary and much more complex than it actually is. We’d rather ownership be approachable, so we’re breaking down some of the common terms you might see or hear.
What’s a capital gain?
Whenever you own stock, there’s a possibility the value will change over time. In some cases, the value might increase—that’s considered a “gain.” (As you might guess, a decrease in value is considered a “loss.”)
When you sell your stock for more than you initially got it for (aka your “basis”), the difference is called a “capital gain.”
For example, let’s say you bought $5 of stock in Totally Made Up Company. Your basis is $5. Now let’s say the value of your shares increases to $10 and you decide to sell. That’ll result in you realizing a $5 capital gain. (A capital gain is considered “realized” when you sell the stock.)
Alright, we just defined about five things in one short section, so here’s the cheat sheet if you need to refer back to any of those jargon terms:
- Basis: the value of your stock when you first get it
- Gain: when your stock increases in value (compared to your basis)
- Loss: when your stock loses value (compared to your basis)
- Capital gain: when you sell your stock for more than you got it for—also referred to as “realizing a gain”
What are capital gains taxes?
A capital gain may be considered a taxable event by the IRS. When tax time comes, any capital gains you have from the year could be subject to federal taxes—and if you have them, you’re obligated to pay them.
That said, here are a few more things to keep in mind when we’re talking taxes.
How long you own the stock matters.
If you own shares of a stock for more than a year before selling them, that’s called a “long-term capital gain.” If you hold them for less than a year, you’ve got a “short-term capital gain” on your hands. Short-term capital gains are typically taxed at a much higher rate than long-term capital gains.
Losses can offset gains.
Stock prices don’t always go up. Sometimes they go down. When you sell a stock for less than what you got it for, you’re “realizing a capital loss.” And capital losses can offset your gains when it comes to taxes.
Not all investments may be subject to taxes.
Roth IRAs and 401ks, for example, might not be taxed when you take them in retirement. Also, tax-sheltered retirement plans like 401ks and Traditional IRAs may—as the name suggests—be sheltered from tax implications until you retire. After that, they’re usually taxed at a normal income rate.
A quick note about Bumped & taxes
Everyone’s tax situation is different and taxes aren’t our gig. We don’t give tax advice, and you might want to check with an advisor or expert if you’ve got a tax-related question.