Capital Gains Tax Law and Legal Definition

A capital gain is the difference between what one paid for an investment and what was received when s/he sold that investment. A capital gain tax is assessed on profits realized from the sale of a capital asset. For example, stock. A capital gain is assessed on the difference between cost basis of an asset and its fair market value.

In the U.S., individuals and corporations pay income tax on the net total of all their gain. Usually, capital gains are taxed at a preferential rate. The purpose is to provide incentives for investors to make capital investments and to fund entrepreneurial activity. Short-term capital gains are defined as investments held for a year or less before being sold and are taxed at the investor's ordinary income tax rate. At the same time, long-term capital gains apply to assets held for more than one year and are taxed at a lower rate than short-term gains.