Capital gains are profits made from the sale of a capital asset, such as stocks, bonds, real estate, and personal property. These profits can be short-term or long-term. Short-term capital gains refer to profits made on investments held for a year or less, while long-term capital gains refer to gains made on investments held for more than a year, and are subject to more favorable tax rates.

When calculating a capital gain, you are comparing the cost basis of the asset with its current or sale price. Cost basis is the original value of the asset including any commissions or fees, purchase price, and improvements. If the sale price is greater than your cost basis, you have a realized capital gain.

Capital gains are generally taxed as either short-term or long-term. Short-term capital gains are taxed at the taxpayer's ordinary income tax rate, while long-term gains enjoy more favorable rates. Long-term capital gains rates are 0, 15, or 20 percent depending on your tax bracket (how much you make a year) and your filing status. Capital losses can often be used to offset capital gains in the same tax year.

Capital gains are among the most important sources of income for investors because they signify that the value of their investment has increased over time. Investors must carefully manage their capital gains, because the gains may be short-term, potentially triggering the higher ordinary income tax rate.

Understanding capital gains and the associated taxes is essential for any investor. Failure to accurately assess and report capital gains can lead to hefty penalties, so investors should take the utmost care in filing their taxes correctly. Furthermore, investors should strive to assess the value of their investments and keep careful records to maximize profits and minimize taxes.