The US tax system, managed by the IRS (Internal Revenue Service), has two main layers. An investor generally pays tax at the Federal level (across the whole country) and at the State level (depending on their state of residence — states like Texas or Florida have no state income tax, while California or New York have very different rules).
The two major federal income categories:
- Ordinary Income: Money you receive from your salary, freelance income, bank account interest, and some dividends. Taxed at progressive rates ranging from 10% to 37%.
- Capital Gains: The profit you make when you sell an asset (shares, crypto, real estate) for more than you paid. The taxation of these gains is completely different and depends on how long you held the asset.
⚠️ Important
The universal principle holds: you only pay tax on capital gains when you sell. While you hold a share that has risen in value, that gain is 'unrealised' and the IRS charges you nothing on it.