Capital gain arises when an asset is sold and consists of the difference between the basis (normally the acquisition price) and the sales price. Corporate stock accounts for 20% to 80% of taxable gains, depending on stock market performance. Real estate is the remaining major source of capital gains, although gain also arises from other assets (e.g., timber sales and collectibles). The appreciation in value can be real or reflect inflation. Corporate stock appreciates both because the firm's assets increase with reinvested earnings and because general price levels are rising. Appreciation in the value of property may simply reflect inflation. For depreciable assets, some of the gain may reflect the possibility that the property was depreciated too quickly. If the return to capital gains were to be effectively taxed at the statutory tax rate in the manner of other income, real gains would have to be taxed in the year they accrue. Current practice departs from this approach. Gains are not taxed until realized, benefitting from the deferral of taxes. (Taxes on interest income are due as the interest is accrued.) Gains on an asset held until death may be passed on to heirs with the tax forgiven; if the asset is then sold, the gain is sales price less market value at the time of death, a treatment referred to as a "step-up in basis." Taxes on long-term capital gains (on assets held for at least a year) are imposed at rates that correspond to pre-2018 brackets: a 0% rate for those whose income placed them in the regular 15% bracket or less (now in the 12% bracket), and 15% for taxpayers in higher brackets, except for those in the 39.6% bracket. The tax revision adopted in December 2018 ( P.L. 115-97 ) maintained the links to the income level corresponding to the rate brackets in prior law. Therefore, the tax rates on capital gains are affected only by changes in the deductions to arrive at taxable income and the use of a different method of indexing for inflation. Under the new law, the original 10% and 15% brackets are replaced by a single 12% rate bracket that ends at the same point as the end of the 15% bracket. There is no 39.6% bracket (the top rate is 37% and begins at a higher level than the top bracket under previous law). In 2017, the 39.6% bracket began with taxable income of $470,700 for joint returns and $418,400 for single returns. Gain arising from prior depreciation deductions is taxed at ordinary rates, but there is a 25% ceiling rate on the gain from prior straight-line depreciation on real property. Gain from collectibles is taxed at 28%. There is also an exclusion of $500,000 ($250,000 for single returns) for gains on home sales. Health reform legislation in 2010 provided for a tax of 3.8% (the same level as the Medicare rate of 3.8% on labor income) on high-income taxpayers on various forms of passive income, including capital gains. The tax applies to passive income in excess of $250,000 for joint returns and $200,000 for single returns. Gains in partnership interest derived from the performance of investment services (carried interest) are treated as long-term capital gains if held for at least three years. In contrast to these provisions that benefit capital gains, capital gains are penalized because many of the gains that are subject to tax arise from inflation and therefore do not reflect real income. Capital gains were taxed when the income tax (with rates up to 7%) was imposed in 1913. An alternative rate of 12.5% was allowed in 1921 (the regular top rate was 73%). Tax rates were cut several times during the 1920s. Capital gain exclusions based on holding period were enacted in 1924, and modified in 1938, to deal with bunching of gains in one year. In 1942 a 50% exclusion was adopted, with an alternative rate of 25%. Over time, the top rate on ordinary income varied, rising to 94% in the mid-1940s, and then dropping to 70% after 1964. In 1969 a new minimum tax increased the gains tax for some; the 25% alternative tax was repealed. In 1978 the minimum tax on capital gains was repealed and the exclusion increased to 60% with a maximum rate of 28% (0.4 times 0.7). The top rate on ordinary income was reduced to 50% in 1981, reducing the capital gains rate to 20% (0.4 times 0.5). The Tax Reform Act of 1986 reduced tax rates further, but, in order to maintain distributional neutrality, eliminated some tax preferences, including the exclusion for capital gains. This treatment brought the rate for high-income individuals in line with the rate on ordinary income—28%. In 1989, President Bush proposed a top rate of 15%, halving top rates. The Ways and Means Committee considered two proposals: Chairman Rostenkowski proposed to index capital gains, and Representatives Jenkins, Flippo, and Archer proposed a 30% capital gains exclusion through 1991 followed by inflation indexation. This latter measure was approved by the committee, but was not enacted. In 1990, the President proposed a 30% exclusion, setting the rate at 19.6% for high-income individuals. The House also passed a 50% exclusion with a lifetime maximum ceiling and a $1,000 annual exclusion, but this provision was not enacted into law. When rates on high-income individuals were set at 31%, however, the capital gains rate was capped at 28%. In 1991, the President again proposed a 30% exclusion, but no action was taken. In 1992, the President proposed a 45% exclusion. The House adopted a proposal for indexation for inflation for newly acquired assets: the Senate passed a separate set of graduated rates on capital gains that tended to benefit more moderate-income individuals. This latter provision was included in a bill ( H.R. 4210 ) containing many other tax provisions that was vetoed by the President. No changes were proposed by President Clinton or adopted in 1993 and 1994, with the exception of a narrowly targeted benefit for small business stock adopted in 1993. The value of the tax cap was increased, however, in 1993, when new brackets of 36% and 39.6% were added for ordinary income. In 1994, the "Contract With America" proposed a 50% exclusion for capital gains, and indexing the basis for all subsequent inflation, while eliminating the 28% cap; this exclusion would be about a 40% reduction on average from current rates. The Ways and Means Committee reported out H.R. 1215 , which restricted inflation indexing to newly acquired assets (individuals could "mark to market"—pay tax on the difference between fair market value and basis as if the property were sold to qualify for indexation), did not allow indexation to create losses, and provided a flat 25% tax rate for corporations. The 1995 reconciliation bill ( H.R. 2491 ) that was vetoed by the President included these revisions but delayed the indexation provision until 2002. During the 1996 presidential election, Republican nominee Robert J. Dole proposed a slightly larger capital gains cut, and both candidates supported elimination of capital gains taxes on virtually all gains from home sales. In 1997, President Clinton and Congress agreed to a tax cut as part of the reconciliation. The Administration tax cut proposal included the change in tax treatment of owner-occupied housing. The House bill included a reduction in the 15% and 28% rates to 10% and 20%, about a 30% cut. Capital gains would also be indexed for assets acquired after 2000 and held for three years; mark-to-market would also be allowed. The Senate and the final bill did not include indexing. Under the final legislation, there was a maximum tax of 20% on capital gains held for a year. This change also would have taxed gain from assets held five years and acquired after 2000 at a maximum rate of 18%. For gain in the 15% bracket and below, an 8% rate would apply to any gain on assets held for five years and sold after 2000, with no required acquisition date. Under law prior to 1997, several rules permitted avoidance or deferral of the tax on gain on owner-occupied housing, including a provision allowing deferral of gain until a subsequent house is sold (rollover treatment) and a provision allowing a one-time exclusion of $125,000 on gain for those 55 and over. These provisions were replaced with a general $500,000 exclusion ($250,000 for a single individual), which cost only slightly more in revenue. The capital gains issue was briefly revisited in 1998, when the holding period for long-term gains was moved back from the 18 months set in 1997 to the one-year period that has typically applied. The 1999 House bill would have cut the rates to 15% and 10%: the conference version cut rates to 18% and 8% and proposed indexing of future gains, but the bill was vetoed. Capital gains were discussed during the consideration of the economic stimulus bill at the end of 2002, but not included in any legislative proposal (and no proposal was adopted). The temporary provisions for lower rates of 15% for 2003-2008 for those in the higher brackets and to 5% in 2003-2007 and 0% in 2008 for taxpayers in the 15% bracket or lower were adopted in 2003. H.R. 4297 , adopted in 2006, extended these lower rates for two more years. P.L. 111-312 , enacted in 2010, extended the lower rates for an additional two years, through 2010. The American Taxpayer Relief Act of 2012, P.L. 112-240 , made these lower rates permanent except for very high incomes. Health reform legislation in 2010 provided for a tax of 3.8% on high-income taxpayers on various forms of passive income, including capital gains.