capital gains tax

capital gains tax

Tax levied on gains realized from the sale or exchange of capital assets. Though capital gains have been taxed in the U.S. since the advent of the federal income tax, certain capital gains are taxed less heavily than regular income, while others are exempted from taxation. This preferential treatment is intended to encourage investment and thereby stimulate economic growth. In theory the tax break encourages investors to risk their capital in new ventures. Critics argue that preferential treatment results in distorted patterns of investment because regular income is converted into capital gains in order to avoid paying income tax. See also corporate income tax.