According to Wikipedia, "Capital gain is a profit that results from investments into a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price. It is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the investor. Conversely, a capital loss arises if the proceeds from the sale of a capital asset are less than the purchase price."
Many times, capital gains refer to investment income that comes from real assets, such as property; financial assets, such as shares, stocks or bonds; and intangible assets such as goodwill.
Many countries, including the United States, impose a tax on capital gains for individuals or corporations. Many times, however, relief is available for exempt capital gains. Exempt capital gains are usually for holdings in specific assets, such as significant common stock holdings, to provide incentives for entrepreneurship, or to recompense for the effects of inflation.
In the United States, individuals and corporations have to pay income tax on the net sum of their capital gains, just as they do on other types of earnings. Capital gains are normally taxed at a privileged rate in comparison to ordinary income. The special rate is intended to create incentives for investors to make capital investments and to finance entrepreneurial activity. The total an investor is taxed depends on their tax bracket and the amount of time the investment was kept before being sold. Short-term capital gains are taxed at the investor's ordinary income tax rate, and are sold after being held for a year or less. Long-term capital gains relate to assets held for more than one year and are taxed at a rate lower than short-term gains. The long-term rate was reduced to 15 percent in 2003, and to 5 percent for individuals in the lowest two income tax brackets. The reduced tax are effective through 2010. If the lower rates are not extended before the end of 2010, they will expire and the previously used rate of around 20 percent will go back into effect.
The reduced tax rate of 15 percent on qualified dividends and long term capital gains, was extended through 2010 due to the Tax Reconciliation Act, signed into law by President George W. Bush on May 17, 2006. Previously, it was set to expire in the end of 2008.