Capital gains occur when a capital asset, such as a home, household furnishings, real estate, stocks, or bonds, is sold. The difference between the amount realized in the sale - basically the selling price - and the basis - usually the original price you paid for it - is a capital gain or loss.
You must report all capital gains and losses to the IRS using Form 8949 and Schedule D on Form 1040. These forms determine the amount of wealth generated through investment activity.
The capital gains tax is then applied to any net capital gains. Net long-term capital gains are currently taxed at a lower rate than normal income tax rates. In most cases the long-term capital gains tax rate is currently set at 15%. Short-term capital gains, on the other hand, are taxed at ordinary income tax rates. If you had a net capital loss, you can deduct the amount against your other income.