What is a long-term capital gain?

A long-term capital gain is defined as a profit that arises from the sale of an asset that has been held for more than one year. This classification is important because long-term capital gains typically enjoy more favorable tax treatment compared to short-term capital gains, which are realized from assets held for one year or less. By encouraging long-term investment, the tax code aims to promote stability in the markets and incentivize investors to hold assets for extended periods.

This differentiation in holding periods significantly affects an investor’s tax liabilities, thereby influencing their investment strategies. Long-term capital gains are subject to lower tax rates than ordinary income, which can have practical implications for financial planning and investment approaches.

The other options each describe different concepts that do not align with the definition of long-term capital gains. For instance, a profit from selling an asset held for less than one year corresponds to short-term capital gains, while profits associated with high-risk investments or rental income relate to different areas of finance and investment. Hence, when discussing the nature of long-term capital gains, option C accurately captures its essence in the context of investment and taxation.