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 Alabama, as in other states, capital gains tax applies to the profit made from selling an asset for more than its purchase price. Capital gains are considered income and are subject to taxation both at the federal and state levels. The federal government taxes capital gains at different rates depending on whether they are long-term or short-term. Long-term capital gains, from assets held for more than one year, are taxed at lower rates than short-term gains, which are from assets held for less than a year. These rates are indeed typically lower than the ordinary income tax rates. Alabama follows the federal tax treatment of capital gains, meaning that capital gains are included in the state income tax base. However, Alabama does not have a separate capital gains tax rate; capital gains are taxed at the same rates as other income, which range from 2% to 5%, depending on the total amount of taxable income. It's important to consult with an attorney or tax specialist to understand the specific implications for any capital gains transactions.