What are the tax implications of capital gains?

Capital gains tax is fundamentally based on the profit made from selling an asset. When an individual sells an asset such as stocks, real estate, or other investments, they incur capital gains tax on the difference between the selling price and the purchase price. This profit, if realized, becomes taxable income and is subjected to capital gains tax. The rate of this tax can vary depending on several factors, including the holding period of the asset.

The classification of capital gains into short-term or long-term also significantly impacts the tax rates applied. Short-term capital gains, which arise from assets held for one year or less, are typically taxed at ordinary income tax rates. In contrast, long-term capital gains, resulting from assets held for more than one year, are taxed at lower rates.

This understanding underscores that capital gains tax is not a blanket rate, as it can change based on how long the asset was held before selling, thus making choice C the most accurate and encompassing explanation of the tax implications associated with capital gains.