A capital gain is the amount by which an asset's value exceeds its original purchase price. This amount is realized when the asset is sold. If the holding period prior to sale is less than one year, the gain is classified as a short-term capital gain. If the holding period is longer, the gain is classified as a long-term capital gain. Different income tax rates apply to each of these classifications.
Long-term capital gains are taxed at a much lower rate than short-term gains, in order to encourage the retention of assets and securities for long periods of time.