What type of income includes capital gains?

Capital gains are considered a specific form of investment income generated from the sale of assets such as stocks, bonds, or real estate when those assets are sold for more than their purchase price. The profits made from these transactions are classified as capital gains and fall under the broader category of investment income.

Investment income plays a crucial role in a taxpayer's overall financial picture, as it can significantly impact tax liability depending on the taxpayer's overall income level, the type of investment, and how long the asset is held. Short-term capital gains, for instance, are typically taxed at ordinary income rates, while long-term capital gains often benefit from lower tax rates, providing tax advantages to investors who hold assets for longer periods.

In contrast, taxable income encompasses all forms of income that are subject to taxation, including wages and investment income, but does not specifically identify capital gains as its main component. Wages are earned income from employment and do not include capital gains, while exempt income refers to income that is not subject to tax at all. Thus, identifying capital gains as investment income is accurate and highlights its specific classification within the broader context of income types for tax purposes.