A capital gain is the profit you make when you sell an asset — a stock, a fund, a property — for more than you paid for it. The tax on that profit is a capital gains tax, and it works differently from the tax on your wages. The single most important rule to grasp first is timing: you’re generally taxed only when a gain becomes realized.
The U.S. and Canada both tax capital gains, but they use different machinery to do it — holding periods and special rates in one country, an inclusion rule in the other. Understanding each keeps you from applying the wrong mental model to your own situation.
Realized vs unrealized gains
An unrealized gain is a paper gain: your investment has risen in value but you still own it. In most cases it isn’t taxed — watching a stock climb creates no tax bill on its own. The gain becomes realized when you sell, locking in the profit, and that is typically the moment the tax attaches.
This timing has a practical consequence: you have some control over when gains are recognized. Choosing to hold rather than sell defers the tax, which is why long-term investors can let gains compound untaxed for years before a single realization event.
Gains you haven’t sold are gains you generally haven’t been taxed on. The tax clock usually starts at the sale, not at the gain.
The U.S. system: short-term vs long-term
In the United States, how long you held the asset decides how the gain is taxed. The dividing line is one year:
- Short-term gains — assets held one year or less — are taxed as ordinary income, at the same rates as your wages.
- Long-term gains — assets held more than a year — get preferential rates that are generally lower than ordinary income rates.
That gap rewards patience: selling a winner a few days past the one-year mark can move it from ordinary rates to the lower long-term brackets. The exact rate you pay depends on your income, so the calculators here let you enter your own rate rather than assume one.
Canada’s inclusion rule
Canada takes a different path. Rather than a special rate, it uses an inclusion rate: only a portion of a capital gain is added to your taxable income, and that amount is then taxed at your normal marginal rate. The long-standing inclusion rate is 50%, so half of a realized gain is included and half is effectively tax-free.
In practice, a CAD 10,000 gain adds CAD 5,000 to your income, which is taxed at whatever rate applies to you. Because the rule interacts with your overall income and can be subject to legislative change, entering your own effective rate is the reliable way to estimate the bill.
The wash-sale and superficial-loss idea
Losses can offset gains, but tax rules stop you from manufacturing a loss while keeping the same position. In the U.S., the wash-sale rule disallows a loss if you buy the same or a substantially identical security within 30 days before or after the sale. Canada’s equivalent, the superficial loss rule, denies the loss under similar circumstances within a 30-day window.
- You can’t sell purely to book a loss and immediately rebuy the identical holding.
- Waiting out the window, or buying something genuinely different, preserves the loss.
- The rules apply to losses, not gains — realizing a gain and rebuying is fine.
The throughline in both countries is the same: capital gains tax is a tax on profit you’ve actually realized, and the details — a holding period here, an inclusion rate there — decide how much of that profit you keep.