What is the purpose of a capital gains tax?

The purpose of a capital gains tax is to levy tax on returns from asset sales. This tax is specifically applied to the profit made from selling an asset, such as stocks, bonds, or real estate, where the selling price exceeds the purchase price. Capital gains can be classified as short-term or long-term, depending on how long the asset was held before selling, which can affect the tax rate applied.

By taxing the profits derived from asset sales, governments can generate revenue, which can be used for various public services and infrastructure. This tax serves to ensure that individuals and corporations who profit from investments contribute a portion of their gains back to the economy. The capital gains tax aims to maintain fairness in the tax system, as income earned through investments is recognized as subject to taxation just like regular income.