What is Capital Gains?
Capital gains are profits earned from selling a security for more than its purchase price. Short-term gains (held less than one year) are taxed at ordinary income rates; long-term gains enjoy lower tax rates.
Capital Gains Explained
Tax considerations should inform your trading strategy but not drive it. Short-term capital gains (positions held less than one year) are taxed at your ordinary income rate (up to 37% in the US). Long-term capital gains (held over one year) are taxed at 0%, 15%, or 20% depending on your income level. High-frequency traders face significant tax burdens that must be factored into their required returns.
Real-World Example
You buy a stock at $100 and sell at $130 after six months — a $3,000 gain on 100 shares. This is a short-term capital gain taxed at your income rate (say 32%), costing $960 in taxes. Had you held 13 months, the long-term rate might be 15%, costing only $450.
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