Capital Gains Glossary
Understanding the Terms
Before diving in, here are a few terms we’ll use throughout this page — and that you may see on your account statements or tax forms.
Unrealized Gain
A gain that exists on paper but hasn’t been taxed yet because you haven’t sold the investment.
Example: You invested $10,000 in a fund five years ago. It’s now worth $16,000. You have a $6,000 unrealized gain. No taxes are owed until you sell.
Realized Gain
A gain that has been “locked in” by selling an investment. Once realized, it becomes taxable income for that year.
Example: You sell that same fund for $16,000. Your $6,000 unrealized gain is now a realized gain — and will appear on your tax return.
Capital Loss
The opposite of a gain — when you sell an investment for less than you paid for it. Capital losses can be used to offset capital gains, reducing the amount of tax you owe.
Example: You sell one fund for a $6,000 gain and another for a $2,000 loss. You only owe taxes on the net $4,000 gain. If your losses exceed your gains in a given year, you can use up to $3,000 of the excess to offset ordinary income
— and carry any remaining losses forward to future years.
Tax-Loss Harvesting
The intentional practice of selling an investment at a loss in order to generate a capital loss that offsets gains elsewhere in your portfolio. The goal is to reduce your tax bill without meaningfully changing your investment strategy — we typically reinvest the proceeds in a similar (but not identical) investment to keep your portfolio on track.
Example: In a down market, one of your funds has dropped in value, creating a $4,000 unrealized loss. We sell it, locking in that loss, and immediately reinvest in a comparable fund. The $4,000 loss can now be used to offset $4,000 of gains elsewhere — reducing your tax bill while keeping your portfolio invested and balanced.
Income Tax Rate (Ordinary Income Rate)
The percentage of income you pay in federal taxes, based on how much you earn. The U.S. uses a progressive system, meaning higher income is taxed at higher rates — currently ranging from 10% to 37%. Your “ordinary income rate” is the rate that applies to wages, salary, interest, and short-term capital gains.
Example: If your taxable income puts you in the 24% federal bracket, any short-term capital gains are also taxed at 24% — the same as if you had earned that money as a paycheck.
Short-Term Capital Gains
Gains on investments held for one year or less. These are taxed at your ordinary income tax rate — typically higher than the long-term rate.
Example: You buy a fund in March and sell it in October of the same year for a $5,000 gain. That $5,000 is taxed as ordinary income. Depending on your bracket, that could mean a 22%, 24%, or higher tax rate.
Long-Term Capital Gains
Gains on investments held for more than one year. These receive preferential tax treatment — most people pay 0%, 15%, or 20% depending on their income. However, higher-income households may also owe an additional 3.8% Net Investment Income Tax (NIIT) — a Medicare surcharge that applies once your income exceeds certain thresholds. This can bring the effective rate on long-term gains to as high as 23.8%.
Example: You hold a fund for 14 months and sell for a $10,000 gain. Depending on your income, you might pay 15%
— $1,500 — or as much as 23.8% if the NIIT applies — $2,380. Either way, it’s significantly less than you’d pay at the ordinary income rate.
Capital Gains Budget
The target amount of realized gains we plan to recognize in a given year, established in your annual Tax Plan. Trading decisions are made with this number in mind.
