Capital Gains and Losses: What Investors Should Know

When investments change in value, investors may eventually realize capital gains or capital losses. Understanding the basic terminology helps investors recognize how investment decisions and taxes can interact.

What is a capital gain?

A capital gain generally occurs when a capital asset is sold for more than its cost basis. A capital loss generally occurs when an asset is sold for less than its adjusted basis.

Unrealized versus realized results

An investment that has increased in value but has not been sold generally has an unrealized gain. Selling the asset generally realizes the gain or loss and can create tax consequences.

Holding period can matter

Under U.S. federal tax rules, gains and losses are generally classified as short term or long term based on how long the asset was held. Different tax rates and rules can apply.

Losses may have tax implications

Capital losses may offset capital gains and, subject to tax rules and limits, may affect taxable income. Rules can change and individual circumstances differ.

Taxes should be part of the investment picture

Tax consequences are one consideration among many. Investors should avoid making an investment decision solely for a tax outcome and should consult current IRS guidance or a qualified tax professional for personal tax questions.

Educational note: This article is for general educational purposes and does not provide individualized investment, tax, or legal advice. Investing involves risk, including possible loss of principal.