How Do Capital Gains Taxes Impact Your Investments?
The New Investor's Guide to Understanding Capital Gains and Capital Gains Taxes
It's important that all new investors understand capital gains and the role capital gains taxes play in your portfolio. By simply holding assets in certain types of accounts, or making sure you reach certain holding period lengths, you might be able to save tens of thousands of dollars or more in capital gains taxes. That's money that ends up in your pocket for your own family, rather than being sent to the Internal Revenue Service. I put together this guide to capital gains to help you understand some of the things you need to know and understand before jumping into investing.
Before you can learn how to lower your potential capital gains taxes, you need to understand what capital gains are and how they are treated differently by the government depending upon what you own. This brief introduction was designed to help you learn those basics in under two minutes.
How much will you pay in capital gains taxes when you sell a stock, bond, mutual fund, gold, silver, work of art, or real estate? It all depends. This step-by-step guide to capital gains tax rates was designed to give you an overview of how long you need to own an asset to qualify for lower capital gains tax treatment. You may be surprised by what you find.
Did you know that the length of time you hold an investment could have huge implications for the total capital gains taxes you owe the IRS at the end of the year? In some cases, holding a stock, bond or mutual fund for just a few more days could save you hundreds of thousands of dollars. This concept of long- or short-term investments is a concept that it is important to understand, especially if you are inheriting investments or putting aside money for the distant future.
If you aren't careful, you may trigger the dreaded capital gains wash sale rule and find yourself taking a tax deduction from which you have inadvertently disqualified yourself! If you don't know the wash sale rule or how it changes your capital gains tax reporting, take the time to read this short explanation. It can help you avoid making a very expensive mistake.
Actually, it isn't just stocks. You can avoid paying capital gains taxes by donating almost any asset, including real estate, mutual funds, or bonds, to your favorite 501(c)3 charity. That means more cash going to your favorite causes instead of the IRS. There are some rules you need to follow, but if you have a good investment and you want to support a worthy cause instead of paying capital gains taxes, here are some ways you can do it.
Capital gains are great! There's nothing better than buying something for $20 and selling it for $150. Still, there is a body of evidence that shows almost all stock market returns come from reinvested dividends. The bull market that ran from 1982 through 2000 convinced many investors that their success depended upon capital gains only. Nothing could be further from the truth. I cannot overstate the importance of you learning this lesson. Stop what you are doing and find out the truth about capital gains and the role they play in your returns.
To know how well you are doing when it comes to investing, you need to learn how to keep score. There are two scores that matter to you as a new investor: total return, and compound annual growth rate. Both are fairly easy to learn and the capital gains earned on your investments represent an important part of the calculation. Discover how to perform these two calculations yourself, putting you ahead of most finance majors.
There is a special investing strategy that is easy to use and can save you tons of money in capital gains taxes. Every new investor needs to study it and put it to work in their own portfolio. What is this magic formula? It's called asset placement. By putting certain types of investments in certain types of tax-advantaged accounts, it's possible you could save yourself huge capital gains tax bills.