Capital Gains & Taxes

Sep 19 · 3 min read

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When the value of a stock or bond increases from where you initially bought it, you have technically made money. This profit is called a capital gain. This capital gain is “unrealized” until you actually sell the asset for cash. “Unrealized” gains are not taxed. This means your investments can rise as much as they want and you won’t get taxed until you actually sell them. Once you sell your stock or bond, the profit you made becomes “realized” and is subject to capital gains tax.

As an example, if you buy a share for $10 and sell it to another investor for $15, at the end of the year you will be taxed on the $5 profit. This is because your $5 profit is considered a capital gain.

Selling Multiple Assets

If you sell multiple stocks within a year, you will only be taxed on your net capital gain. For instance, in the same year, you sold a stock and profited $100 but lost $50 on another. You will only be taxed on a net capital gain of $50 at the end of the year.

Capital Losses

If your net gain happens to total to a negative number, you actually have capital losses for the year. It sucks to lose money in the stock market, but there is a silver lining. Because you have net losses, you will be able to deduct them on your taxes. You can deduct up to a few thousand dollars as this is the capital loss deductible limit. Fortunately, any loss above this limit can be deducted in the following years until it is 100% deducted. This is called capital loss carryover.

Short Term vs. Long Term Capital Gains

The actual rate of your capital gain tax will vary depending on if your investment was considered short or long term. Short term investments are assets that were held for one year or less than while long term investments were held for over a year. Taxes vary based on what country you live in, but in the U.S., short term capital gains are added to your annual income and taxed at your income tax rate.

As of 2019:

DATA SOURCE: TAX FOUNDATION. INCOME RANGES REPRESENT TAXABLE INCOME, NOT JUST CAPITAL GAINS. MARRIED FILING SEPARATELY RATES CALCULATED AS HALF OF THOSE FOR JOINT FILERS.

Long term investments are instead taxed at a generally lower rate but still depending on your income.

As of 2019:

DATA SOURCE: TAX FOUNDATION. INCOME RANGES REPRESENT TAXABLE INCOME, NOT JUST CAPITAL GAINS. MARRIED FILING SEPARATELY RATES CALCULATED AS HALF OF THOSE FOR JOINT FILERS.

Key Takeaway

As you can see, most investors will save money on capital gains taxes if they hold their assets for more than a year. There is even an opportunity to pay no capital gain taxes at all! As you trade securities like stocks and bonds, make sure to keep capital gain taxes in mind and how to minimize them.

Capital Gains & Taxes

If you’re buying assets like stocks and bonds, you eventually want them to make you money right? Well of course you do! Before you rake in this cash, you’ll want to learn about capital gains and how they’re taxed.