What does the capital gains tax specifically target?

The capital gains tax specifically targets the profits made from the sale of non-inventory assets. This tax is imposed on the appreciation in value of investments or properties when they are sold for more than their purchase price. Essentially, it applies to the gain realized on investments such as stocks, real estate, or other capital assets that are not held as inventory in a business. The inherent premise of a capital gains tax is that any profit made from these transactions reflects an increase in wealth, which the government captures via taxation upon realization of that gain through the sale.

This taxation structure encourages investors to think strategically about the timing of their asset sales and the potential tax implications of realizing gains. In contrast, depreciation targets the decline in value of fixed assets, total revenue encompasses a broader spectrum of income, and passive income from dividends constitutes a different category of investment income not measured by capital gains taxation.