Minimize Taxes on Capital Gains from Stock Investment - dummies

Minimize Taxes on Capital Gains from Stock Investment

By Paul Mladjenovic

Long-term capital gains from stock investments are taxed at a more favorable rate than ordinary income. To qualify for long-term capital gains treatment, you must hold the investment for more than one year (in other words, for at least one year and one day).

A short-term transaction is taxed as ordinary income. If you hold on to the stock for more than a year, you achieve the status of long-term capital gains. How does that change the tax? For anyone in the 28-percent tax bracket or higher, the long-term capital gains rate of 15 percent applies.

Capital gains taxes can be lower than the tax on ordinary income, but they can’t be higher. If, for example, you’re in the 15 percent tax bracket for ordinary income and you have a long-term capital gain that would normally bump you up to the 28 percent tax bracket, the gain is taxed at your lower rate of 15 percent instead of a higher capital gains rate.

Check with your tax advisor on a regular basis, because this rule could change due to new tax laws.

Don’t sell a stock just because it qualifies for long-term capital gains treatment, even if the sale eases your tax burden. If the stock is doing well and meets your investing criteria, hold on to it.