The definition of a capital gain is defined as making a profit on an asset that was purchased at a lower price than what it was sold for. The sales of certain assets are subject to capital gains tax, such as stock and bond investments, and real property.

Cost Basis

Capital gains tax is based on cost basis, and in order to ascertain if one has a sale subject to this tax, cost basis must first be determined. Cost basis is a way of measuring the investment in terms of dollars. For example, the cost basis of a stock sale is determined by a comparison of the purchase price vs. the sale price. The cost basis of property is the amount paid for the property with cash assets, and also any debt obligations already on the property, plus any fees involved in acquiring the property, compared to what that same property is sold for.

Holding Period

The reporting of a capital gain or loss depends on how long the asset is owned. The length of time is known as the holding period. Assets are acquired and sold based on the transaction date, not the
settlement date. For example, certain stock purchases and sales often have a delay of several days to settle the purchase or sale and to transact the fees, therefore the asset may have a different transaction date (the date the asset is bought or sold) than the settlement date (the date the stock is physically acquired by a purchaser).

Holding periods are classified as either short term or long term. If a capital asset is held for one year or less, the gain or loss from its disposition is considered short term. If the capital asset is held longer than one year, the gain or loss is considered long-term.

The general rule for determining the holding period is to begin counting on the first date after the day the property is acquired. The same date of each following month is the beginning of a new month, regardless of the number of days in the preceding month. The last day of the holding period is the day of disposition.

For example, stock purchased on May 21st 2007 and sold on May 21st 2008 would be considered short term because the holding period did not begin until May 22nd 2007, the day after it was purchased. So that stock was held for just under one year. If that same stock was purchased on May 21st 2007 and sold on May 23rd 2008, it is a long term transaction because it was held for a year and a day.

Capital Gains on Stock

The basis of stock is generally the purchase price plus any costs

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