What are Capital Gains and why are they taxed at special rates?
A capital gain arises whenever the price of an asset such as a house or shares in a corporation or mutual fund exceeds the asset’s purchase price. In other words, if you buy as asset for $100 and sell it sometime later for $150, then your investment has generated a $50 capital gain. Thus, capital gains differ from income in that income represents the return to the use of factors of production such as capital and labor, whereas capital gains represent changes in the market value of capital. The price of an asset reflects the market’s determination of the discounted after-tax stream of income or services the asset is expected to generate over its lifetime. The market price of a house, for example, is determined by the value of the housing services it is expected to provide, after tax and net of operating costs such as electricity costs, and net of maintenance costs. However, because of the time value of money, the value of these future services must be discounted appropriately, in effect
