Capital gains taxes are taxes on the appreciation of an asset. Capital gains can be either short-term or long-term designations that refer to how long you owned the asset before you sold it. This tax can also be realized or unrealized, depending on whether or not you sold the asset. If you owned the asset for less than twelve months and then sold it, appreciation of the asset would be considered realized short-term capital gains, and the asset would be taxed at your marginal tax rate (i.e., the tax rate on your last dollar of income—up to 35 percent in 2009). If you owned the asset longer than twelve months before selling it, any appreciation of the asset would be considered realized long-term capital gains, and the asset would be taxed at a lower rate (as low as 15 percent for some assets).

Unrealized capital gains taxes can be postponed until you sell an asset, but tax rates are dependent on how long the asset is held and on the marginal tax rate of the owner. While you can postpone capital gains taxes, you cannot postpone taxes on distributed earnings from mutual funds or bonds and dividends from stocks.

Capital gains can also be earned through home ownership. Perhaps you purchased a house years ago for $150,000, and it is worth $400,000 today. Gains of up to $500,000 for couples and $250,000 for individuals are exempt from taxes. However, the home must be your principal residence and you must have lived there and owned the home for two of the five years preceding the sale. There is no longer a need to roll over the gain, as you would have done before the Taxpayer Relief Act of 1997.