What is a capital gains tax?

• A. Tax on the profit of a sale of property or an investment
• B. Tax on wages
• C. Tax on estate value
• D. Tax on consumption

Answer: (A)

Capital gains tax is a tax on the profit you realize when you sell an asset such as a stock or a property. The gain is calculated as the sale price minus what you paid (the cost basis), and you owe the tax only when you actually sell the asset. Holding periods can matter—the tax rate for gains held longer may be lower than for short-term gains, and there can be exclusions or exemptions in some cases. This is different from a tax on wages (income tax on earnings from work), an estate tax (tax on the value of an estate at death), or a consumption tax (sales or VAT on purchases). For example, if you buy an asset for $5,000 and later sell it for $7,500, the $2,500 gain is the amount typically subject to capital gains tax, subject to any applicable rules or exemptions.