Investing 101

Capital Gains Tax / Generating Additional Wealth

Did you know that you can pay ZERO in taxes on Capital Gains?

Short term gains - holding securities for less than one year are always taxable based on your tax bracket
Long term gains are taxable based on income (0%, 15%, 20%) - holding on to securities longer than one year
- - However, if you are single and make less than $44,625 your long term gains are tax free
  - Married Filing Jointly < $89,250 is tax free
  - Remember, this is based on all income (job/career and investments)
  - A career in investing by investing long term (over one year) can yield a tax advantageous situation
see Capital Gains Taxation IRS, Capital Gains Tax (2021 - Nerd Wallet explanation which is easier to read)
Note: You pay taxes on your net income from short term or long term investments (Gains - Losses)
- - If during a year, you made 200 trades that resulted in $100,000 profit and 100 trades that results in $80,000 loss, you would be taxed on the $20,000.
  - If you had a net loss for the year, more losses than gains, the IRS allows you to report up to $3,000 as a loss under the standard deduction.
  - Any net losses over $3,000 are rolled to subsequent years.
If you master your long term trading, holding stocks longer than a year, you could potentially pay zero taxes on your gains.

Short Term Gains

For the investments that you purchase and sell in the same year (365 days)

Subject to capital gains according to your tax bracket
Below is the current tax brackets
To calculate your taxes, determine your Adjusted Gross Income (AGI; Income from all jobs and investments minus any deductions) and use the appropriate tax rates
If you have long term and short term investments, the long term trades will be use the long term cpaital gains tax while your short term will be taxed like normal income (e.g. job, income related work, selling items on eBay, swap meet, or online).

The Difference in Taxation

Let us compare the difference in taxation based upon our filing status and the amounts we make. The left column represents the Long Term Investors and the right column represents Short Term investors. Remember the following from above:

Long Term Investment Capital Gains are taxed at (0%, 15%, 20%)
Short Term investment Capital Gains are taxed based upon your tax bracket

Example Single - Long Term Investment

You made $9,875 from long term investing and made no other income
You would not be taxed on the full amount
You would pay zero in taxes based on the brackets

Example: Single - Short Term Investment

You made $9,875 from short term investing and made no other income
10% of $9,875 = $987.50

Example Single - Long Term Investment

You are single and made $90,000 from long term investing and made no other income
What amount is not subject to taxation?
The remaining balance would be taxed at 15%
How much would you pay in taxes?

Sample Answer (Approximation for 2023)

In 2023, the first $44,625 for a single person is tax free
Your remaining balance would be taxed at 15%
$90,000 - $44,625 = $45,375 (taxable)
Total Taxes $45,375 x 15% = $6,806.25

Example Single - Short Term Investment

You are single and made $90,000 from short term investing and made no other income
Determine the amounts for each tax bracket.
How much money is being taxed in each bracket?

Sample Answer (Approximation for 2023)

$11,000 x 10% = $1,100
$33, 725 ($44,72 - $11,000) x 12% = $4,047
$45,275 ($90,000 - $44,725) x 22% = $9,960.50
Total Taxes $1,100 + $4,047 + $9,960.50 = $15,107.50

While there is no guarantee that you would receive the same returns, if you held your short term positions for longer than a year, the tax savings is substantial: $15,107.50 - $6,806.25 = $8,301.25 more taxes from short term capital gains.

Let's take a look at example of people who file as Married.

Example Married - Long Term Investment

You are Married filing jointly and made $90,000 from long term investing and made no
What amount is not subject to taxation?
The remaining balance would be taxed at 15%
How much would you pay in taxes?

Sample Answer (Approximation for 2023)

In 2023, the first $89,250 for Married filing jointly would be tax free
$90,000 - $89,250 = $750 (taxable)
$750 x 15% = $112.50
Total Taxes $112.50

Example Married - Short Term Investment

You are Married filing jointly and made $90,000 from short term investing and made no other income
What amount is not subject to taxation?
The remaining balance would be taxed at 15%
How much would you pay in taxes?

Sample Answer (Approximation for 2023)

$22,000 x 10% = $2,200
$67,450 ($89,450 - $22,000) x 12% = $8,094
$550 ($90,000 - $89,450) x 22% = $121
Total Taxes $2,200 + $8,094 + $121 = $10,415

Based on the approximate calculations above, you would save a substantially less in taxes ($10,415 - $112.50 = $10,302.50 less in taxes) if all of your positions were held longer than a year (365 days). Once again, there is no guarantee that holding positions longer will result in the same or greater returns, but we can see the benefit of finding investments that we can hold longer than a year.

Think about it 1: Taxes

What did you notice about the taxes between long term and short term investing capital gains? (ACE response)
Would you rather have long term or short term gains?
What is the upside and downside of investing only in long term trades (longer than 365 days)?
What is the upside and downside of investing only in short term trades (less than 365 days)?
Give examples for why you would have a short or long term investment.

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