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Do You Pay Taxes On Investments? Short-Term Gains Vs Long-Term Gains Differences

Dec 9, 2021

Do you pay taxes on investments? If you’re like many Americans, the answer is yes.
 

Why?

Because taxes are essential for our society and necessary in order to maintain our way of life.
 
And investments are not any different. But there are ways to get around paying more than your fair share of taxes.
 
This happens through capital gains.
 

SHORT-TERM AND LONG-TERM CAPITAL GAIN DIFFERENCES

Investing is a great way to grow your assets and secure your financial future.

The question is, what do you need to know when it comes time for filing your taxes?

Basically, it boils down to this. Typically, there are two times that your taxes are affected by your investments:

1. When you receive income from investments; and

2. When you sell the investments for a gain or loss.

In the world of income taxes, there are two types of income gains: short-term capital gains and long-term capital gains.

Short-term capital gains consist of profits from an asset sold within a year of purchase and are taxed according to your tax bracket as regular income ranging from 10% to 37%.

Long-term capital gains come from assets you’ve held for more than one year before selling them. They’re taxed according to your taxable income between 0%, 15% and 20%.

For example, if your income is $100,000 a year, you would fall in the 15% tax bracket for long-term capital gains, but for short-term capital gains, you’d be at 24%.

Keep in mind that your gains and losses will determine which bracket you fall into.

Typically, you only have to pay taxes on the sale of investments when you receive a gain.

You need to pay attention to your investments because certain types of investments have higher capital gain tax rates.

Are there ways to lower your capital gains to help lessen the tax burden when you file your income taxes? Yes.

HOW CAN YOU LOWER YOUR CAPITAL GAINS?

The good news is, you can offset your capital gains:
 
  • Hold on to your asset for longer than a year. This will move you to a different tax bracket.
 
  • Utilize your retirement accounts. IRAs, 401(k)s and 529 plans allow investments to grow tax-free or tax-deferred.
 
 
  • Contribute to a health savings account which is also tax-free and assets grow tax-free.
 
  • A capital loss lowers your tax rates. Capital loss is money you lost through your investments. It caps out at $3,000.00 so you can carry over your capital loss until the next year.
 
It might seem like it doesn’t matter by what type of gain you have. But when buying and selling assets in your portfolio, you need to consider how long you’ve owned them as well as their timing relative to upcoming events that could result in higher or lower taxes. The potential difference can be enormous!
 
Not sure which type of investment is best for you? Reach out to us and we’ll work with you to discuss what will be most beneficial for your financial goals.