Selling Shares Capital Gains Tax – Taxes can impact the growth of your portfolio, so it’s important to understand how capital gains taxes work and learn some strategies that can potentially minimize them.
Narrator: One of the main ways to profit from investing is to buy assets at one price and then sell them at a higher price.
Selling Shares Capital Gains Tax
These types of profits are known as capital gains. Like most types of profits, they are subject to taxes. Taxes can impact the growth of your portfolio, so it’s important to understand how capital gains taxes work and learn some strategies to potentially minimize them. Let me note up front that in this video we are only covering the basics. Taxes can be complex and vary based on many factors, so it’s always best to consult the IRS or a tax professional to understand your specific situation.
Capital Gains Tax Rates For 2022 Vs. 2023
Let’s start with a simple example. Let’s say you are an average investor and have a regular taxable brokerage account. You buy a share of XYZ stock for $50, and over the course of a year, it increases to $60. At this point, you have earned $10, but it is an unrealized gain, because you don’t actually make a profit until your position is closed. No matter how long you hold the stock or how much its price changes, you will not be taxed on the gain unless you close the position and the gain remains unrealized.
Note that other types of income from stocks, such as dividends, may still be subject to taxes, but these may not be considered capital gains. Now, back to our example. Let’s say you decide to sell the stock for $60. This is considered a realized capital gain and is a taxable event. You now have taxes on the $10 profit.
We’re focusing on stocks in this video, but be aware that capital gains taxes also apply to other types of investments such as real estate, bonds and mutual funds.
So, how much are capital gains taxed? It mainly depends on two factors: how long you have kept the investment and your income level.
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There are two types of capital gains: short term and long term. Income from investments that you sell after holding for a year or less are generally classified as short-term capital gains.
Animation: The buckets show the breakdown of $82,000 in wages for a single filer in 2020 using the standard deduction. $9,875 taxed at 10%, $30,250 taxed at 12%, and $41,875 taxed at 22%.
Narrator: They are typically taxed at the same rate as your ordinary income, which is determined by the marginal tax bracket you fall into. Capital gains are stacked on top of your ordinary income. So, let’s say you earned $82,000 in wages. Any capital gains would be added on top of that for tax purposes.
Narrator: So, if you saw $12,000 in short-term capital gains, that counts as part of your highest tax bracket. Capital gains can push you into a higher tax bracket if they push your income above the bracket limit.
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For reference, marginal income 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.
Income from investments held for more than a year are typically classified as long-term capital gains. For stocks, long-term capital gains tax rates are generally much lower than ordinary income tax rates.
Animation: The buckets show the breakdown of $200,000 in wages for a single filer in 2020 using the standard deduction. $40,000 taxed at 0%, $160,000 taxed at 15%, and $0 taxed at 20%.
Narrator: As of 2020, the long-term capital gains tax rates were 0%, 15%, and 20%, depending on your income level.
Capital Gains Taxes Explained
The specific rate may still vary depending on your income, but rates can change over time, so it’s best to check with the IRS or a tax professional.
In addition, if your income exceeds a certain limit, your investment earnings may also be subject to the 3.8% Net Investment Income Tax.
In most cases, you report capital gains for the year as part of your annual tax return, which can increase your tax liability when you file. If you have realized a gain, it may be a good idea to have money set aside in case you have to pay, or, depending on your circumstances, plan to make estimated tax payments during the year.
Because taxes can significantly impact your portfolio’s performance, it’s important to be proactive in tax planning. Here are a few strategies you can follow.
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Active investors can try to increase income by buying and selling investments quickly. But when considering trading strategies, don’t forget to consider the tax implications. Capital gains taxes can take a big bite out of any profits. Because of the increase in taxes and fees, it is difficult for many people to skip a well-diversified portfolio of long-term investments that are often taxed at the lower rate of long-term capital gains. When planning your investment strategy, consider how the investment holding period may affect your tax bill.
Depending on the type of account, you may be able to buy and sell investments without being subject to capital gains taxes. Reducing your tax burden can potentially help your portfolio grow faster.
Narrator: Third, in taxable accounts, make the most of your losses. Benefit from losses may seem counterintuitive, but the IRS actually allows you to write off certain trading losses, which can help offset some of your capital gains taxes. For example, tax loss harvesting is a strategy that involves closing certain positions to intentionally realize a loss that reduces your tax liability.
Of course, tax planning and some capital gains calculations can be confusing. This is why even seasoned investors seek the help of tax professionals to ensure that their taxes are in order.
Tax Loss Harvesting: Definition And Example
Health savings accounts are for more than just routine medical expenses. By investing a portion of your account, you can potentially grow your funds tax-free.
Popular for helping to eliminate state taxes on certain assets, incomplete nongranting (ING) trusts have come under scrutiny from the IRS and tax authorities of certain states.
Does not provide tax advice. This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, he recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.
This material is intended for informational purposes only and should not be considered a personalized recommendation or investment advice. Investors should review investment strategies for their particular situations before making any investment decisions.
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Final And Capital Gains Tax
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When you invest in a company by buying individual stocks, mutual funds, or exchange-traded funds (ETFs), you may be rewarded with dividends. A dividend is a portion per share of the company’s profits that is distributed regularly to its shareholders – a type of quarterly bonus.
How Capital Gains Affect Your Taxes
Like many other types of investment income, the IRS considers dividends to be taxable. However, not all dividends are treated — or taxed — in the same way.
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