What is capital gains tax?

Capital gains tax refers specifically to the tax levied on the profit that an individual or corporation realizes when they sell a non-inventory asset for more than its purchase price. This tax is significant in the context of investments, as it applies to the sale of stocks, bonds, real estate, and other types of assets. When an asset is sold at a profit, the difference between the selling price and the original purchase price constitutes the capital gain, which is subject to taxation.

This tax is essential for understanding how investment returns are impacted by taxation and provides insight into the behavior of investors regarding holding periods, as different rates can apply to short-term versus long-term capital gains. In contrast, taxes on salary income pertain to earned income, corporate profits relate to the earnings of companies, and value-added services involve taxation based on the incremental value that a service adds to an existing product or service, none of which directly relate to the definition of capital gains tax.