Capital gains tax is a tax on income received from the sale of an asset—such as a business, real estate, your home, stocks, bonds, coin collections, and jewelry. Capital gains tax is paid on the financial gain between the amount you paid for (or invested to build) the asset, and the amount for which it is sold.

The rate (percentage) paid as capital gains tax has traditionally been lower than the rate (percentage) paid on income tax. And the Internal Revenue Service (IRS) has traditionally taxed long term gains differently than short term gains—with the distinction based on how long the taxpayer owned or held the asset.

In Pennsylvania, capital gains are treated as regular income and are subject to the state's income tax rate. As of the knowledge cutoff in 2023, Pennsylvania has a flat income tax rate, which applies to all taxable income, including capital gains. This means that the gain from the sale of assets such as businesses, real estate, stocks, and other personal property is taxed at the same rate as other types of income, without a separate capital gains rate. For federal tax purposes, the IRS distinguishes between short-term and long-term capital gains based on the asset holding period. Short-term capital gains, from assets held for one year or less, are taxed as ordinary income at standard federal income tax rates. Long-term capital gains, from assets held for more than one year, are taxed at reduced rates, which are typically lower than the rates for ordinary income. Taxpayers in Pennsylvania must report and pay federal capital gains taxes according to these IRS rules, in addition to state taxes on the same gains.