Well, hearing about the investment income tax seems to be a boring topic. There should be some sort of mysterious jargon language, which is familiar to accountants and people who enjoy reading fine print on cereal packages. But the reality is different and not that complicated. Let me introduce you to the basics which will allow you to save money in the future.
To start with, it is necessary to state that the government is quite pleased with the idea of receiving a part of the profit which you receive from the assets sale. No matter what the asset is – whether it is stock, cryptocurrency, or simply profitable savings account, there is no choice to pay taxes. The tax share will depend on how long you owned the asset. The profit from selling the asset within a year is called short-term capital gains and the government will take its share of profit according to your ordinary income tax rate.
The longer you held the asset, the less tax you will have to pay because the profit will be considered long-term capital gains. Such taxes are normally lower and the percentage rates can vary depending on the profit – the rates are 0%, 15% or 20%. Therefore, it is a great encouragement to hold your stocks longer than a year.
Remember about the dividends – they are the payments of the cash for the ownership of the shares in the company. Normally, the dividends are subject to taxation just like the ordinary income. However, there are some cases where dividends are “qualified” and have the same rates of capital gain taxes. You will need to meet some conditions in order to receive them.
Also, it is vital to keep in mind the opportunities to use the tax-advantaged accounts like 401(k) and IRA. In case of traditional 401(k) the contribution is exempted from the tax, and the profit will also be exempted until the withdrawal. If we consider the Roth IRA, then it works vice versa. In other words, you pay the taxes now, but not in the future. Therefore, you can decide yourself whether to pay the tax now or in the future.
One more interesting concept is the tax-loss harvesting which means selling losing investments to reduce the tax of the profitable investments. If you earned $1000 from Apple and lost $1000 from the meme stock, it means that you will pay 0% taxes.