What is ‘capital gains tax’?

Capital gains tax refers specifically to the tax levied on the profit that an individual or business realizes from the sale of a non-inventory asset, such as stocks, bonds, and real estate. This tax is applicable when these assets are sold for more than their original purchase price, meaning that the profit made is considered a capital gain. The tax rate can vary depending on how long the asset was held before selling, distinguishing between short-term and long-term capital gains.

The other choices do not accurately capture the essence of capital gains tax. For instance, a tax on the purchase of property would not involve profit realization from a sale; rather, it would traditionally be a transfer tax or a sales tax. Similarly, taxes on income generated from rental properties relate to ordinary income rather than capital gains, and a tax based on property value typically refers to property tax, which is assessed based on the value of the property owned rather than on profits made from selling assets.