What is the Difference Between Capital Gains and Income?

The main difference between capital gains and income lies in their sources and taxation. Here's a comparison of the two:

Capital Gains:

• Capital gains refer to an increase in the value of an asset, such as a stock or a bond.
• Realized capital gains are created when an appreciated asset is sold, and they are taxable.
• Unrealized capital gains are not taxed until the asset is sold.
• Long-term capital gains tax rates are often lower than ordinary income tax rates.
• Short-term capital gains are taxed as ordinary income.

Investment Income:

• Investment income consists of payments such as dividends and interest, as well as realized capital gains.
• Investment income derives from a company's earnings, such as dividends or interest on outstanding bonds.
• Ordinary income tax applies to regular earnings like wages, salaries, and interest, and is taxed at the marginal tax rate.

In summary, capital gains are profits realized from the sale of an asset, while investment income includes dividends, interest, and other earnings from investments. Capital gains are generally taxed at a lower rate than ordinary income, and short-term capital gains are taxed as ordinary income.

Comparative Table: Capital Gains vs Income

Here is a table comparing the differences between capital gains and income:

In summary, capital gains result from the sale of investments, and they are taxed at different rates depending on the holding period. Income, on the other hand, is earned from regular activities and is subject to ordinary income tax rates.