As an investor, you'll need to understand what capital gains are, how they are taxed, and how they can affect your investment strategy. A capital gain is the amount of money you make on an investment when it is sold. It is the difference between the money you sell it for and the money you paid for it. For example, if you buy a stock for $100 and you sell it for $200, you have made a capital gain of $100.

Capital gains and losses apply to capital assets. A capital asset is an asset in which you make an investment. Stocks, real estate, and even a piece of art are examples of capital assets.

There are two types of capital assets: long-term and short-term. Short-term assets are those assets held a year or less. Long-term assets are held for more than a year. At the time you sell the asset, you will have a long-term or short-term capital gain or loss, depending on how long you held the asset. You must hold an asset for more than one year for it to qualify as a long-term gain.

Long-term gains are taxed at a lower rate than short-term gains, which are taxed at the same rate as ordinary income. Portions of capital losses of either length are tax-deductible. Both long-term and short-term gains should be reported separately on Schedule D of the 1040 tax form.

Because tax rates on capital gains can vary so greatly, it's important to know when you've earned capital gains, whether they qualify as long-term gains, and when you are actually obligated to pay taxes on them.