Capital gains vs. ordinary income

- Let's talk about the two different kinds of income. There's ordinary income and there's capital gains income. Ordinary income is just what it sounds like, ordinary income, such as wages, salary, interest on your bank account. Capital gains income arises when you make an investment and the value of the investment increases. Let's say you buy a stock portfolio. Hopefully you're going to buy low and sell high. Let's say I buy at $1,000 and sell at $1,300. That $300 increase is called capital gains income. So there's ordinary income, wages, salary, interest on bank accounts, and there's capital gains income, income from the increase in value of investments. Well, worldwide, and particularly in the United States, capital gains income is typically taxed at a lower rate than is ordinary income. Now, we could get in a long, philosophical discussion about whether this is right or wrong. Let me just give you the rationale on both…