Trade

Investing and Taxes: What You Need to Know

7 mins read

Nowadays, the sheer abundance of ways with which one can make money can be a little overwhelming, but the stock market remains as reliable and chaotic of an option as ever.

It provides ample opportunities for a variety of investors to become successful. Certain individuals prefer to play it safe – they avoid risky moves and rely on carefully planning out each step. Others are far bolder, acting as the high-rollers of the stock exchange and making dicey, but potentially quite lucrative, decisions.

Regardless of which category you fall into, there is one thing everyone can agree on – taxes are an absolute headache to deal with. So much so, in fact, that many novices will attempt to avoid the problem altogether until the deadline for the annual tax return starts drawing near. Such situations are avoidable so long as you are informed and resist the temptation of procrastination.

Capital Gains and Losses

A good starting point is figuring out what will be taxed when it comes to your investments, and the first thing we will take a look at is capital gains.

Capital gains are a fairly straightforward concept. Let us say you bought stocks that cost $2000. Down the line, you find yourself with the opportunity to sell them for $3000. This is the best possible scenario, since selling the stock for more than you bought it for is often the entire goal of purchasing stocks, after all. In this case, you will have earned $1000. This sum, or in other words, your profit, is what we refer to when we say capital gains.

There are various factors that will affect just how much you would be taxed in such a situation, but the most crucial one is the holding period of your investment. If it took you more than a year to sell the stocks in question, then these capital gains are subject to long-term capital tax rates. This type of capital gains is favored among investors since the tax rates can be 0%, 15%, or 20%. In contrast, the tax you could incur from short-term capital gains, i.e. selling a stock within a year of buying it, starts at 10% and can go all the way up to 37%. Additionally, it is good to keep in mind that depending on your income, you could also be subject to a 3.8% net investment income tax.

See also  8 Ways To Use Virtual Cards In Your Business

On the other side of the spectrum, we have capital losses. As the term implies, they are the opposite of capital gains, but they can still be beneficial for your portfolio thanks to a technique called tax-loss harvesting. This aptly named strategy involves utilizing your capital losses in order to offset the tax cost of capital gains. It is not the most elegant of options and we advise against relying on it too much, but it can be quite useful in the right hands.

Dividends and Interest Income

Essentially, both are a way of making money from your investments without actually selling your stocks. Like capital gains, however, your profits here will also be taxed.

Dividends are the payments companies distribute among their shareholders, and they come in two variations: ordinary and qualified. The former are taxed as ordinary income, while the latter enjoy long-term tax rates. There are a couple of requirements that need to be met for a dividend to be qualified. The stock must be traded on U.S exchanges, for one, and the investor must have owned the stock for a couple of months. As for interest income, it is also taxed as ordinary income.

In addition, it is worth noting that there are certain investment accounts that are unique when it comes to how they are taxed. Retirement accounts, referred to as IRA’s, are one such example. They are tax-deferred, and you will only incur taxes when you withdraw money. Such accounts are not without their downsides, seeing as you will typically be prevented from accessing your funds without penalty until you are nearly 60 years old, but they are a great option for many individuals.

See also  Best Online Slot Gaming Recommendations By Seasoned Pros

The Big Picture

If it is starting to seem like there is quite a lot of information to consider, that is indeed the case. With that in mind, we also wish to point out that you do not need to shoulder everything alone. You can always hire a tax advisor who can assist you depending on your specific situation and preferences. In fact, many accomplished shareholders and investors, in general, go this route, so it is worth considering. Moreover, this is an excellent way to minimize the amount of time you spend working on your taxes without neglecting them.

This is excellent, seeing as taxes are not the end all be all of your experience with the stock exchange, after all. There are tons of moving gears to keep track of when you invest in the stock market. Oanda broker taxes and fees, for instance, are something you will need to take note of each time you trade if Oanda is your firm of choice, and things like this, as well as financing costs, will vary from broker to broker.

In the end, taxes are just one of many factors that can influence your investment decisions, so the more time you are left with to focus on everything else, the better.

Leave a Reply