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Oh boy, tax season!
Yes, whether you like it or not, we have to deal with taxes every year. And if you’re new to investing you might have questions on how your investments get taxed.
Today, we’re going over capital gains taxes to help with any confusion you might have. After reading this article, you’ll know what to expect for tax season.
So first, let’s define a very important term in the investing world - capital gains.
Defining capital gains
So, what the heck is a “capital gains tax?”
First, we have to understand what capital gains are; your capital gains refer to the profits you make when you sell assets like stocks or pieces of real estate.
So, capital gains tax is when you get taxed for the profits you make from your assets.
That’s right. When you sell your stocks at a profit, you can officially get taxed for your “gains”.
And there are two different categories your capital gains fall under when determining your tax rate:
Long term capital gains
Short term capital gains
Here’s the difference between the two:
If you sell your investment within one year of purchase, your gains are taxed as “short-term capital gains.”
If you sell your investment after one year, your gains are taxed as “long-term capital gains.”
Pretty straight forward right?
Let’s dive deeper and define both of these terms. Starting with short-term capital gains.
Short-term capital gains
As stated, short-term capital gains tax is a tax on profits made from selling an asset you held for less than one year.
Short-term capital gains are taxed at the same rate as your regular income.
Here are the federal income tax brackets for 2022 in case you don’t know what tax bracket you’re in.
2021 short-term capital gains rates (federal income tax brackets and taxes due April 2022)
2022 Short-term capital gains rates (federal income tax brackets and taxes due April 2023)
If you’re confused about what these numbers mean, check out our article “How Exactly Do Tax Brackets Work?” so you get a solid understanding of income taxes.
Long-term capital gains
Most investors prefer long-term capital gains taxes over short-term because long-term capital gains are taxed at lower rates.
Long-term capital gains are taxed at only 3 different rates:
0%
15%
20%
2021 Long-term capital gains rates
2022 Long-term capital gains rates
How are capital gains reported?
Taxpayers must report their gains and losses to the IRS on Form 1040, Schedule D, “Capital Gains and Losses.”
Capital losses can be used to “offset” taxes on your capital gains. So, if you lost money on an asset and sold that asset (realized loss), you can use that loss to get taxed at a lower rate.
If you’re confused about what all this means, you may want to seek a tax professional to help you avoid making any mistakes.
What now?
For most people, taxes aren’t the most exciting subject. And reporting taxes may be easier for some depending on your assets and the type of job you have. So, it’s always wisest to work with a tax professional or financial advisor during tax season to be thorough.
Tax professionals can also help you decrease your overall tax payment because they can help you with write offs and offsets.
It’s important to understand tax strategies if you want to create a long-term financial plan for yourself. And seeking help from a professional will help you strategize the best.
You can continue to educate yourself by reading the articles in our archive or watching the videos on our YouTube channel. And you can even join our membership! With our premium membership, we’ll teach you not only how to invest in great long-term stocks, but also sell covered calls and cash-secured puts, trade LEAPS options, and generate a couple hundred to a couple thousand dollars each month. You’ll have exclusive access to our community of wealth builders & all our content, which teaches you step-by-step on how to use these strategies. You’ll also be able to ask me & our team any questions you have & we can coach you each week!