Glossary

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Capital Gains Tax
A capital gains tax is a tax on profits from selling a non-inventory stake in a company. If this interest in the business is sold for a loss, there is no tax. For example, say an investor buys stock for $15 a share. If that investor were to then sell that stock for $18 a share, the investor would be charged a 15 percent capital gains tax on the extra $3 a share. Capital gains taxes are classified as either short-term or long-term. Short-term capital gains are generally taxed at a higher rate than long-term capital gains. This is meant to encourage investors to keep their money in a company for a longer period of time. Individuals are allowed to reduce or defer their capital gains taxes through several mechanisms in the tax code. Tax-free savings accounts, a Roth IRA or annuities are common methods of reducing these taxes.