A capital gain occurs when you sell a security at a higher price than you paid for it. The gain is the difference between a higher selling price and a lower purchase price. In the case that a sale of your investment incurs a capital gain, you would need to claim that gain on your income tax forms.
If you bought the security less than a year ago, the gain is considered short-term, and if you bought the security more than a year ago, the gain is considered long-term.
Short-term capital gains are taxed at the same rate as your ordinary income (e.g. your salary). Long-term capital gains are taxed at a lower rate than your ordinary income: depending on your tax bracket, it could be 0%, 15%, or 20%. You can read more about taxes and your Ellevest account in our Magazine.
Capital losses occur when you sell a security at a lower price than what you paid for it. You may be able to use realized capital losses to offset (reduce) your realized capital gains. This would reduce your taxable income.
When you sell securities in your Ellevest account, we maximize losses and minimize your gains whenever possible to reduce your capital gains tax.
Example: If you sold $5,000 worth of securities that were originally purchased for $4,500, you would have a capital gain of $500, assuming you are in the 22% federal tax bracket:
If you held these securities for less than one year, you would owe 22% tax on the $500 capital gain. If you held these securities for more than a year, you would owe 15% tax on the $500 capital gain.