Capital gains tax is a tax imposed on the profit earned from selling an asset for more than its purchase price. The tax rate depends on how long the asset was held: short-term capital gains (assets held less than one year) are taxed at ordinary income rates, while long-term gains (assets held more than one year) are taxed at lower preferential rates.
For example, if you buy a stock for $100 and sell it for $150, your $50 capital gain is subject to tax. Long-term capital gains tax rates are typically 0%, 15%, or 20%, depending on your income level.
Investors can minimize capital gains taxes through strategies like tax-loss harvesting, holding investments for over a year to qualify for lower rates, and using tax-advantaged accounts like IRAs and 401(k)s.