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The Correlation Between Taxes and Investment Gains

March 28, 2024

Taxes play an important role in your investment strategy, regardless of your tax bracket. That’s why it’s important to understand how short- and long-term term capital gains can impact your investments over time. Read the following for a quick explanation on how it works.

Taxes and Investment Gains

Simply put, short-term gains are realized on investments held for under a year, while long-term capital gains are derived from investments held for more than one year. For example, if you purchase 100 shares of stock for $20 per share and sell them six months later for $25 per share, the $500 in profit is considered a short-term capital gain by the IRS and taxed as ordinary income. Conversely, if you wait more than a year to sell the shares, they’ll be taxed at the long-term capital gains rate of 15% to 20%, depending on your tax bracket.

For investors in higher tax brackets, this rate can be substantially lower than the rate applicable to short-term gains.

Depending on your tax bracket, if you held the same shares for a year or more, you could end up making more money if the stock price continues to increase but still pay less at tax time. In addition, only your net investment income is taxable: if you gain $500 from one investment but lose $500 on another in the same tax year, then your net gain is $0 and you aren’t required to pay any additional taxes.

If you’d like to learn more about the relationship between investments and taxable gains in your portfolio, please call. 

This communication is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.

Please note that neither your financial professional nor any of its agents or representatives give legal or tax advice. For complete details, consult with your tax advisor or attorney.