As a first time investor, you’re likely focusing on how to maximize your gains and minimize your losses. But have you thought about how you’ll be taxed come next spring? The best way to approach the uncertainty of investments is by understanding how they will be affected by your taxes. We have the 411 below.
New investors often misunderstand how investments are taxed – instead of simply being taxed on gains, you are instead taxed on realized gains, which are the gains made from selling the shares. That means your gains can continue to grow until you sell; in the same way, if your investments lose value and you sell, you will have realized losses. These realized losses can offset realized gains. If they happen to be equal, you’ll owe nothing in taxes!
Now that you know when your investments are taxed, you need to be privy to by how much; this depends on how long you’ve held the share. Short term capital gains are held for less than a year, while long terms gains are held for a year or longer. Short term gains are taxed at the same rate as your tax bracket. Long term gains are not tied to your tax bracket, and are instead taxed at 0%, 15%, or 20%.
In addition to the above, you may be taxed on investments depending on your income. If you are single or head of household with an income over $200,000, or are married filing jointly with an income of over $250,000, you may be taxed 3.8% on net investment income above the threshold amount.
You may have more losses than gains in a year, especially as a first time investor. But the good new is you can reduce it from your income, up to $3,000 per year. Any further losses can be carried over indefinitely.
Due to all of the above circumstances surrounding your new investments and how they’re taxed, keeping your own record is important. Although brokerages keep transaction records, it’s wise to log all of the details of what you purchased, when, and the cost basis. Also note any acquisitions and mergers.
Ready to invest? Keeping in mind the above will help you navigate the investment landscape, allowing you to balance your gains and losses and boost your financial future. If you’re unsure, always consult your tax professional.