It’s exactly what it sounds like— you are gaining on capital (money). So when you buy something (a stock, a mutual fund, a house) and then sell it for a profit, you have a capital gain. (BTW, if you sell it at a loss, you have a capital loss.) If you sell before one year after the purchase, it’s called a short- term capital gain, and you usually don’t get any tax love. Investors want to be taxed at the long- term capital gains level (more than a year) for money they make because it’s way better from a tax perspective since capital gains are taxed at a lower rate than ordinary income. The highest personal tax rate is 35%, whereas the highest cap gains tax bracket is 20%— so by getting as much of their profits into the lower capital gain tax category bracket as possible, they get to keep more of their money.
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