A capital gain happens when you sell an investment at a higher price than you paid for it. The gain is the difference between the (higher) amount you sold it for and the (lower) amount you originally paid. If you incur a capital gain, you will need to claim that as capital gain income when you file your taxes.
A capital loss is the opposite: It happens when you sell an investment at a lower price than you paid for it. The loss is the difference between the (higher) amount you originally paid and the (lower) amount you sold it for. If you incur a capital loss, you may be able to claim that loss as a deduction when you file your taxes.
You may also be able to offset that loss with any earned capital gains from other investments, which would lower your taxable income. When Ellevest sells investments on your behalf, we work to maximize capital losses and minimize capital gains in order to reduce what you’d owe in capital gains taxes.
A couple more notes on capital gains: If you bought the investment less than a year ago, it is considered a short-term capital gain, and if you bought the investment more than a year ago, it is considered a long-term capital gain.
Short-term capital gains are taxed at the same rate as your ordinary income (in other words, just like your salary). Long-term capital gains are taxed at a lower rate than your ordinary income — depending on your tax bracket, your rate could be 0%, 15%, or 20%. You can read more about taxes and your Ellevest account in this article.
Example: If you sold $5,000 worth of investments that were originally purchased for $4,500, you would have a capital gain of $500. If you held these securities for less than one year, you would owe 22% tax on the $500 capital gain (assuming you’re in the 22% federal tax bracket). If you held these securities for more than a year, you would owe 15% tax on the $500 capital gain.