What type of tax applies when investors sell stocks for a profit?

When investors sell stocks for a profit, they are subject to a Capital Gains Tax. This tax is specifically applied to the profit made from the sale of assets, including stocks. The key factor here is the "gain"—the difference between the selling price of the stock and its purchase price, known as the cost basis. If the stock is sold for more than it was bought, the investor realizes a capital gain, which triggers this particular tax.

The Capital Gains Tax comes in two forms: short-term and long-term. Short-term capital gains apply to stocks held for one year or less and are taxed at the investor's ordinary income tax rate. Long-term capital gains apply to stocks held for more than one year and are typically taxed at a lower rate, encouraging long-term investment in the market. This tax structure highlights the importance of the holding period of an investment when considering the tax implications of selling stocks.

Other types of taxes mentioned, such as Dividend Tax, apply to earnings distributed from investments rather than to profits gained from selling an asset. Inheritance Tax and Estate Tax are related to transferring wealth upon death, rather than transactions occurring during an individual's investment activities. Understanding these distinctions clarifies why Capital Gains Tax is the relevant tax in the context of