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Capital Gains Tax

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Capital Gains Tax

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Definition: Capital gains is another way of saying how much money you made when you sold an investment, such as mutual funds, stocks, or bonds. The term capital gains also applies to money you made when you sold other investments, such as real estate, precious metals or collectibles. Capital gains is the net profit - in other words, the total sale price minus any costs, including the original cost of the investment and any transaction costs.

How it affects you is the IRS taxes capital gains. It taxes short-term capital gains (investments you've held for a year or less) differently thant long-term capital gains (investments you've held for more than a year).

Short-term capital gains are taxed at your regular income tax rate. If the Bush tax cut is extended, then you don't have to pay taxes on long-term capital gains if you are in the 10% and 15% tax brackets.Even if you make more, you only have to pay a 15% tax. Therefore, it's usually better from a tax point of view to hold onto your investment for at least a year.

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