Short vs. Long Term Capital Gains

Taxes can play a big part in investment decisions. Below, we'll look at the tax situation in the US. If you are in a different country, we advise that you investigate the tax requirements there.

As we all know too well, Uncle Sam will find a way to get his share. Fortunately, the government also wants to encourage an enterprising culture. That’s why they’ve created tax benefits associated with investing, in the form of capital gains tax rates.

Your short-term gains are taxed the same as your ordinary income. However, if you hold stock longer than 365 days and earn a positive return before you sell it, it’s considered a long-term capital gain taxed between 0 to 20%. While income tax rates vary per individual, capital gains tax rates are always going to be lower. That said, how long you hold a stock can have a major impact on the amount of money you actually get to keep in your pocket.

Capital gains from one investment can be offset by capital losses from other investments, mitigating the impact on your personal bottom line. Sometimes it is in your best interest to actually sell an underperforming investment, to lock in your capital loss to offset current or future gains.

While tax impacts are an important part of decision-making, you should always look at them in combination with the fundamentals of the companies you own or other investment opportunities that exist in the market.

Are you a long-term or a short-term investor? Let us know in the comments! And Tap Next to learn more about investing risk, another important factor that you really need to consider before making investment decisions.