Capital Gains Tax

The Capital Gains Tax is used to tax individuals on their stock trading profits or investing profits. There are two different ways in which stock profits can be taxed.

Long Term Capital Gains Tax For a profit to qualify as a long term trade you must own an equity for at least 1 year before selling it. Longer term trades are taxed at a lower rate than short term trades.

Currently long term gains are taxed at 15% if you are in a tax bracket of 25% or higher or 5% if you are in tax bracket of 15% or lower.

Short Term Capital Gains Tax All equities that are sold less than 1 year after you bought it qualifies as a short term gain. This is taxed as normal income; you lose the benefit of paying less if you are a short term trader.

There are a few other things you should be aware of when deciding how much of your profit you will have to give back in the form of taxes.

Dividends There is no way around it, if you get dividends you will be taxed on it. Currently dividends are taxed with a max tax rate of 15%. Obama plans to increase the dividend tax to 20% in you earn more than $250,000. This new tax rate will not affect you if you earn less than $250,000.

Capitol Loss Capital loss must first be used to deduct against capitol gain. It is also divided into two categories, long term and short term. All long term losses must be used to deduct against long term profits first, vice versa. Any remaining loss can be used to deduct remaining gains. For example say you have $4000 in net short term gains and a net long term loss of $500 loss you can deduct the $500 from the $4000 short term gain to leave you with $3500 short term gain.

If you have a net loss overall in your account that loss ($3000 maximum) can be used to deduct against other income. If you have a higher net loss then $3000 the remaining loss can be carried over to next year.

Traders Vs Investors In general long term investors will pay less for their gains then short term traders. However, short term trading can be looked at as more of a business if you are able to qualify as a trader. If you claim to be a trader and are accepted as one by the IRS you will get certain benefits above investors. However, if you claim to be a trader and are not recognized as a trader by the IRS it could work against you and you may have to pay penalties.

Tax rules change all of the time, you must consult a tax advisor when filing for your stock profits. This page is just to give you a rough idea of what to expect when filing your Capitol Gains Tax.

You can also lessen the effects of taxes by opening a 401k account.