Making money on an investment is great and should always be the goal. Sometimes investors get side-tracked from this goal because they are concerned about paying taxes. Don’t be afraid of cashing out an investment because you are worried about how much taxes you will pay. If you do realize a gain on an investment, the IRS will want to know how long did you own the investment? If you owned it for one year or less, the gain is considered “short-term.”
Short-term gains are taxed at your ordinary income rates (tax bracket rates). However, if you owned an investment for 366 days (one day more than a year) the gain is characterized as “long-term.” The taxes on these are better because the rate can be as low as 0% and only as high as 20%. If you’re tax savvy, you’ll remember that the highest tax bracket is 37% so realizing long-term capital gains can produce major savings.
Example: $100,000 Short-term Capital Gain @ 37% = $63,000 gain (net) $100,000
Long-term Capital Gain @ 37% = $80,000 gain (net at 20%)
Bottom line – Long-term capital gains are better than short-term, and short-term gains are better than no gains. So, don’t hold on to investments longer than you should, but if you do hold them for over one year, the tax savings can be substantial!
Built to Last
By: Jim Collins