What is capital gains tax in simple terms? A guide to 2023 rates, long-term vs. short-term

Tax season can feel like a minefield for new and old filers alike. Whether you work with a professional or file on your own, landing on the exact amount you owe Uncle Sam (and vice versa) requires tireless calculation.

An important part of this calculus is the capital gains tax -- a government levy on profits reaped from investments. It applies to everything from your stock portfolio to your jewelry drawer.

Here's what you should know about the capital gains tax, including the 2023 rates and the difference between short-term and long-term profits.

What are the new 2023 tax brackets? Answers here

1099, W-4, W-2, W-9, 1040: What are these forms used for when filing your taxes?

What is capital gains tax?

Let's start at the beginning. What are capital gains? Capital gains refer to any profit you make from buying an asset at one price and selling it at a higher price.

All capital gains, like other profits, are subject to taxes. But there are caveats. For example, if you have a stock with a share price of $100 and it rises to $200 — that is a 'capital gain' but not one that you will be taxed on unless you 'close your position,' meaning you sell that stock for the cash value.

Once you sell the stock and realize the actual capital gain (in this case $100) you can be taxed on that difference.

What is Biden's proposed change to the capital gains tax?

In a budget proposal sure to set off a fiscal tug-of-war with Republicans, Biden offered up a plan to nearly double the current capital gains tax rate.

The current highest tax rate for long-term capital gains investment stands at 20% — Biden's proposal would ratchet it up to 39.6%. This would only effect those in the highest tax bracket: Americans making over $1 million a year.

Who has to file a tax return: It's not necessary for everyone. Here are the rules.

Long-term capital gains vs. short-term

A short-term capital gains tax is levied on the profits of investments that were sold after being held for a year of less. They are taxed at the same rate as your income. The IRS's tax brackets determine the tax you pay for each portion of your income.

A long-term capital gains tax is applied to investments that have been held for over a year before they were sold for a profit. Long-term capital gains are generally taxed at a lower rate. For the 2023 tax year, the highest possible rate is 20%.

Tax season 2023 officially started: Here are key deadlines to keep in mind.

IRS may owe you from 2020 taxes: Here's why and what you need to do to find out if you're owed