WHAT ARE CAPITAL GAINS ? HOW CAPITAL GAINS TAX WORKS FOR KIDS AND TEENS

What you'll learn:

1. What are capital gains tax for kids ?

2. How capital gains works

3. Long term capital gains vs short term capital gains

4. Real world capital gains example

5. How kiddie tax affects capital gains

Let’s say your kiddo buys a stock for $10 and sells it a year later for $50.

Boom — they just made a $40 capital gain.

But before they can go shopping with that money or stash it away for the future, there’s one little thing they (and you) should know about: capital gains tax.

If you're raising a future Warren Buffett or helping your child invest through a custodial account, understanding how capital gains work is a key part of the journey. We’re all for growing wealth and investing early here at KidVestors, but we also believe in learning the full picture — including how taxes come into play.

So, let’s break down capital gains for kids in a way that makes sense (no calculator or finance degree required).

What Are Capital Gains Tax for Kids?

Capital gains tax is the tax you pay on profits from selling investments like stocks, bonds, real estate, or other assets.

When your child sells something for more than they paid for it, that’s a capital gain — and Uncle Sam wants a piece of it.

While adults are used to thinking about capital gains when flipping houses or trading stocks, kids can rack up capital gains too, especially if they have a custodial brokerage account. And guess what? The IRS doesn’t let them off the hook just because they’re cute.

But here’s the kicker: the way kids are taxed on capital gains is different than adults — and sometimes even more complicated. That’s where the Kiddie Tax comes into play (more on that soon).

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How Capital Gains Work: Capital Gains Explained

Let’s simplify it.

Imagine your child buys a share of a company for $20. A few months later, that share is worth $60. They decide to sell. They just made a $40 capital gain.

That $40 is income — not from chores or a lemonade stand, but from investing or more specifically, investment income. And like most income, it can be taxed.

There are a few important things that affect how much tax (if any) your child will owe:

• How long they held the asset before selling

• How much total unearned income they earned that year

• Whether the Kiddie Tax applies

• Your tax bracket (since kids’ gains might be taxed at the parents’ rate)

It’s not just about making smart investment decisions — it’s also about when and how you sell your investments that determines your tax outcome.

Long-Term Capital Gains vs. Short-Term Capital Gains

Here’s where timing becomes everything. There are two main types of capital gains:

1. Short-Term Capital Gains

• These happen when your child sells an investment they held for less than a year

• Taxed at ordinary income tax rates, which are usually higher

• Think of this like flipping a stock quickly — nice for fast profits, but not so nice at tax time

  
  

2. Long-Term Capital Gains

• These kick in when an asset is sold after being held for more than one year

• Taxed at lower rates (typically 0%, 15%, or 20% depending on income)

• Rewards your kiddo for being a patient investor

  
  

Real-world Capital Gains example

If your 14-year-old holds some Apple stock for 14 months and makes a gain of $3,000, they may only owe 0% in capital gains taxes depending on their total income.

But if they bought and sold in 3 months? That $3,000 gain could be taxed at their parents’ marginal income tax rate because of — you guessed it — the Kiddie Tax.

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How the Kiddie Tax Affects Capital Gains

The Kiddie Tax is the IRS’s way of making sure parents don’t hide income under their kids’ names to score lower taxes.

Here’s how it works: If a child under 19 (or a full-time student under 24) has unearned income — like dividends, interest, or capital gains — above a certain threshold, the excess is taxed at the parents’ rate, not the child’s lower one.

For 2025, the Kiddie Tax kicks in when a child’s unearned income exceeds $2,700.

So if your child makes:

• $1,350 or less in gains? No tax.

• $1,350–$2,700? Taxed at the child’s rate.

• Over $2,700? The extra is taxed at the parent’s rate.

  
  

Let’s say your teen makes $4,000 in capital gains. The first $1,350 is tax-free. The next $1,350 is taxed at their rate. But the remaining $1,300? That’s taxed like you earned it, not them.

It’s a good reminder that when your child starts investing, they’re not just growing wealth but they’re stepping into a tax world too.

How KidVestors Teaches These Concepts

Let’s be honest: most adults don’t even fully understand capital gains and taxes.

So how can we expect a 10-year-old to get it? That’s where KidVestors comes in.

We’ve designed our platform to not only teach how to invest, but also why and when to make financial decisions that build long-term wealth. And yes, we cover taxes too — in a fun and digestible way.

Here’s how we do it:

Interactive Lessons

We break down concepts into short, engaging lessons. Think animations, real-life examples, interactive activies and games — not boring lectures.

Real Cash Rewards

Students get to build their own portfolio using KV Bucks, our in-platform currency. As they earn and grow their portfolio, they also earn the chance to cash out real rewards.

Practice, Not Just Theory

Through our stock market simulation, students can practice selling stocks and experience virtual gains (and losses), while learning about capital gains tax without real-world consequences (yet).

Diversification Lessons

Capital gains aren’t just about stocks. Our platform introduces different asset classes including real estate — and how selling any of those might create a tax event.

And because we’re obsessed with making finance fun, we do all this while keeping students motivated!

Capital Gains Are a Win (If You Know the Rules)

Helping your kids invest early is one of the best gifts you can give — and understanding capital gains is part of that process.

The good news? Most kids won’t owe much in capital gains tax. But as they start to grow their portfolio and cash in on their wins, knowing about the Kiddie Tax, short- vs. long-term gains, and how to be a strategic seller becomes essential.

At KidVestors, we believe the earlier kids understand these topics, the more confident (and wealthier) they’ll be later. We’re not just creating future investors — we’re creating informed ones.

So go ahead and encourage your student to buy that stock, watch it grow, and maybe even sell it — but teach them to do it smartly.

And we’re right here to help every step of the way.

Ready to give your kids and teens a financial head start?

Visit www.kidvestors.co and get started today.

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