Capital gains tax

A capital gains tax is levied on the profit made when an asset is sold for more than the owner paid. The "basis" is generally the purchase price, and the gain is the difference. Assets include stocks, bonds, real estate, businesses and collectibles.

In the United States, gains on assets held for more than a year ("long-term") are taxed at lower rates than ordinary income, with brackets of 0, 15 and 20 percent, and there is an additional surtax on net investment income for high earners. Short-term gains are taxed as ordinary income. When assets are inherited, the basis is generally "stepped up" to the value at death, which erases the tax on the gain, a feature often debated. Gains are taxed only when realized, so unsold appreciation is not taxed.

Supporters of low rates argue that the tax is a second layer on income that was already taxed at the corporate level, that it discourages saving and investment, that inflation inflates gains and that lower rates encourage risk-taking. Critics argue that it favors the wealthy, since most gains go to high earners, and creates incentives to turn labor income into gains. Policy proposals include indexing for inflation, ending step-up or taxing gains at death. See also opportunity zone.