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Monique Nguyen
@financepillowtalk

How long should you hold your stocks?

Short-Term Capital Gains vs Long-Term Capital Gains

There is more than one reason to hold stocks for longer periods of time, but one of the BIGGEST reasons is #taxes .

Stocks are taxed at different rates depending on how long you held them. Generally, if you hold a stock for a year or less, you'll pay short-term capital gains. If you hold a stock for longer than a year, you'll pay long-term capital gains.

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less than 1 year = short-term capital gains

more than 1 year = long-term capital gains

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Short-term capital gains are taxed at the same rate as your ordinary income. This tax rate is based on your income and filing status. For 2021, the income tax rates range from 10-37%.

Long-term capital gains are generally taxed at 0%, 15%, or 20%, based on your income and filing status.

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Short-term capital gains tax: 10-37%

Long-term capital gains tax: 0-20%

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Let's look at an example:

You buy 1 share of stock XYZ for $100. After 11 months, it has increased to $130, and you sell it, making a 30% gain. Not bad, right? Well, because you held the stock for less than 1 year, you'll be paying short-term capital gains, which is the same as your income tax bracket. So, if you're in the highest income tax bracket (37%), you will pay $11.10 of those gains to taxes. This leaves you with $118.90, reducing your gain from 30% to 18.9%.

If you had waited at least 12 months to sell your share of XYZ, you would likely be paying 20% long-term capital gains tax. You would pay $6 of your gains to taxes, leaving you with $124, reducing your gain from 30% to 24%.

By waiting an extra month, you've increased your gain by 5.1%. This may not seem like much, but over time it makes a big difference.

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Let me know other ways you've found to be #taxefficient .

Video on how different types of income are taxed: https://youtu.be/N43PxOTSJcE

#taxefficiency #investing101 #investingforbeginners #feedmybrain #investingbasics #newinvestors

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Disclaimer: This is not investing or tax advice. Always do your own due diligence and consult with a professional for individualized advice.

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Resources:

Capital gains tax calculator: https://smartasset.com/investing/capital-gains-tax-calculator

Income tax brackets: https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets

Capital gains tax rates: https://www.nerdwallet.com/article/taxes/capital-gains-tax-rates

IRS 2021 tax rates: https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2021

IRS capital gains and losses: https://www.irs.gov/taxtopics/tc409

Short-term vs long-term capital gains: https://turbotax.intuit.com/tax-tips/investments-and-taxes/guide-to-short-term-vs-long-term-capital-gains-taxes-brokerage-accounts-etc/L7KCu9etn

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