Capital Gain

Realized vs. unrealized

A gain that exists only on paper — your stock has appreciated but you haven't sold — is unrealized. It doesn't trigger tax in most jurisdictions and doesn't lock in the profit; the position can move back below your cost basis tomorrow.

A gain becomes realized when you actually sell. At that moment, the difference between your cost basis (typically purchase price plus any reinvested dividends, fees, etc.) and your sale proceeds becomes a real, taxable capital gain.

Short-term vs. long-term

In the US tax system, holding period changes everything:

• Short-term gains (held one year or less) are taxed at ordinary income rates — the same brackets as your wages, up to 37%.
• Long-term gains (held more than one year) get preferential rates: 0%, 15%, or 20% depending on your taxable income, with potential additional 3.8% Net Investment Income Tax for high earners.

For an investor in the 32% federal bracket, holding through year one drops the tax rate from 32% to 15% — nearly cutting taxes in half. This is the strongest argument for long-term holding from a pure tax efficiency standpoint.

How cost basis works

Cost basis is the dollar amount used to calculate your gain. The straightforward case is a single purchase: bought 100 shares at $50, basis is $50/share.

It gets more complex when:

• You bought at multiple times and prices. Brokers default to either FIFO (first in, first out) or "average cost" basis. Some let you specify lots ("specific identification"), which is the most tax-efficient approach.
• You received the asset as a gift. Basis usually carries over from the giver.
• You inherited the asset. Basis "steps up" to the fair market value at the date of death — a major US tax planning advantage.
• You reinvested dividends. Each reinvested dividend creates a new lot with its own basis.

Tax-loss harvesting and other strategies depend heavily on tracking cost basis correctly. Most brokers report basis automatically for taxable accounts.

Crypto capital gains

Crypto follows the same capital-gains framework in most jurisdictions. Each sale, swap, or use of crypto for purchases is a taxable event. Swapping ETH for USDC realizes any gain on the ETH; spending Bitcoin to buy a coffee realizes the gain on the Bitcoin.

The tracking burden is significant. Active traders generate thousands of taxable events per year, each requiring cost basis. Specialized software (Koinly, CoinTracker, TaxBit) connects to wallets and exchanges to compile the reports.

Rules of thumb

A few patterns most investors should know:

• If you can wait, hold for over a year. The rate gap between short and long-term is large enough to outweigh small market moves in most cases.
• Realize losses to offset gains. Losing positions can be sold to harvest the capital loss, which offsets gains and (up to $3,000/year) ordinary income.
• In tax-deferred accounts, capital gains don't matter. Inside a 401(k) or IRA, buying and selling within the account doesn't trigger current tax. Hold high-turnover strategies and high-yield assets there; hold tax-efficient assets in taxable accounts.
• Beware the wash-sale rule. Buying back the same security within 30 days of realizing a loss disallows the loss for current-year tax purposes. The rule formally applies to securities; crypto is in a gray zone where Congress has flagged interest in extending it but as of early 2025 hasn't.

Capital gains vs. capital gains tax

Capital gains is the economic event — the appreciation realized on selling an asset. Capital gains tax is the tax assessed on that event. The amount of gain is jurisdiction-independent; the tax depends on rates, holding period, and your overall tax situation.