Capital Gains Taxes Explained: Short-Term Capital Gains vs. Long-Term Capital Gains

One of the main ways to profit frominvesting is to buy assets at one price and then sell them at a higher price.These types of profits are known as capital gains. As with most kinds of profits, they’re subjectto taxes. Taxes can impact the growth of your portfolio, so it’s important to understand howcapital gains taxes work and learn some strategies to potentially minimize them. Let me note up frontthat in this video we’re just covering the basics. Taxes can be complex and vary based ona lot of factors, so it’s always best to consult the IRS or a tax professionalto understand your specific situation. We’ll start with a simple example. Let's sayyou’re an average investor and have a regular taxable brokerage account. You buy a share ofstock XYZ for $50, and over the course of a year,.

It increases to $60. At this point, you’vegained $10, but it’s an unrealized gain, because you don’t actually profit until yourposition is closed. No matter how long you hold the stock or how much its price changes, you won’tbe taxed on gains as long as you don’t close the position and gains remain unrealized. Note thatother types of income from stocks, like dividends, may still be subject to taxes, but thesemay not be considered capital gains. Now, back to our example. Let’s sayyou decide to sell the stock at $60. That is considered a realizedcapital gain and is a taxable event. You now owe taxes on the $10 profit.We’re focusing on stocks in this video but be aware that capital gains taxes also applyto other types of investments like real estate,.

Bonds, and mutual funds.So, how much are capital gains taxed? It mainly depends on two factors: how longyou held the investment and your income level. There are two types of capital gains: short termand long term. Proceeds from investments you sell after holding for a year or less are generallyclassified as short-term capital gains. They’re typically taxed at the same rate asyour ordinary income, which is determined by the marginal tax bracket you fall into. For reference,marginal tax rates for the 2020 tax year ranged from 10% to 37%, but rates can change over time,so it’s best to check with the IRS for specifics. Proceeds from investments held for more than ayear are typically classified as long-term capital gains. They’re usually taxed more favorablybecause the U.S. government views them as.

Providing economic benefit. The specificrate may still vary based on your income, but for reference, the 2020 long-term capitalgains rate did not exceed 15% for most people. Again, rates can change over time, so it’s bestto check with the IRS or a tax professional. In most cases you report capital gains forthe year as part of your annual tax return, which could increase your tax liability whenyou file. If you realized any gains, it may be a good idea to have money set aside in caseyou have to pay. Because taxes can significantly impact the performance of your portfolio, it'simportant to be proactive in tax planning. Here are a few strategies you can follow.First, weigh the pros and cons of short-term investments versus long-term investments.Active investors may attempt to increase.

Returns by quickly buying and selling investments.However, because of increased taxes and fees, it’s difficult for most people to outperforma well-diversified portfolio of long-term investments that are almost always taxed ata lower rate. When planning your investment strategy, consider how the investmentholding period can affect your tax bill. Second, consider maximizing tax-advantagedaccounts, like retirement and education accounts. Depending on the type of account, you may be ableto buy and sell investments without being subject to capital gains taxes. Reducing your tax burdencould potentially help your portfolio grow faster. Third, in taxable accounts,make the most of your losses. Benefiting from losses may sound counterintuitive,but the IRS actually allows you to write off.

Certain trading losses, which can help offset someof your capital gains taxes. For example, tax-loss harvesting is a strategy that involves closingcertain positions to intentionally realize losses that reduce your tax liability. Many brokeragesoffer automated tax-loss harvesting services, but it’s not right for everybody, so be sureto check with a tax or financial advisor. Of course, tax planning and some capitalgains calculations can be confusing. That’s why even seasoned investorsenlist the help of tax professionals to make sure their taxes are in order.Thanks for watching. Make sure you subscribe and hit the bell to get notified about new videos.Open an account to get access to more education.

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