What are Capital Gains Taxes?

What are Capital Gains Taxes? 🤔

The profit or loss that results from the sale of an asset is often referred to as a capital gain or a capital loss. Assets can be anything from investments, like stocks and bonds, to physical land. Anytime money is made on the sale of an asset, profits are subject to something called a capital gains tax. Capital gains are classified as either long-term or short-term depending on how long the asset is held before being sold. The length of time an asset is held in conjunction with a couple of other factors will determine an investor’s capital gains tax rate.

Capital gains vs. federal income tax

A few factors determine the rate at which capital gains are taxed: how long the investment was held before being sold, the investor’s income, and the investor’s tax filing status. If an investment is held for less than a year, it is subject to the investor’s federal income tax rate. An investor’s income tax rate is determined by the investor’s income bracket, but it is always less favorable than the long-term capital gains tax. If an investment is held for more than a year, an investor’s income and tax filing status will determine which of the three capital gains tax rates apply: 0%, 15%, or 20%.

What are stock dividends?

When you buy a share of a company, you become a shareholder or partial owner. Often, when a company is doing financially well, it will reward shareholders with regular payments of cash or additional stock, known as dividends. While dividends are considered income, they are subject to different tax implications.

Taxing stock dividends

Whether a cash dividend is qualified or non-qualified will determine what tax structure will apply. A dividend is considered qualified if common stock is held for a minimum of 60 days or preferred stock is held for a minimum of 90 days before the ex-dividend date. If a dividend is qualified it is subject to the capital gains tax rate which, as mentioned, is considerably less than the federal income tax rate. If a dividend is non-qualified, the capital gains tax does not apply and it is subject to the investor’s federal income tax rate. Therefore, for the diligent investor, dividends can provide great tax opportunities. Additionally, if you receive dividends in the form of stock, taxes do not apply until stock is sold and gains are recognized.

How to minimize taxes on stock and dividends? Finish reading the article here: https://public.com/learn/paying-taxes-on-stock-market-gains-in-2021

And don’t forget! If you’re curious about things from tax-loss harvesting, stock splits, to the difference between a stock and an ETF, check out our #Learn page. https://public.com/learn

Next week’s article spotlight will be on #TaxLossHarvesting!

**The above content is provided and paid for by Public and is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals. We do not endorse any third parties referenced within the article. Market and economic views are subject to change without notice and may be untimely when presented here. Do not infer or assume that any securities, sectors or markets described in this article were or will be profitable. Past performance is no guarantee of future results. There is a possibility of loss. Historical or hypothetical performance results are presented for illustrative purposes only.