Understanding Capital Gains (& Losses): General Overview

Good day everyone! I recently received a question about Capital Gains from one of our members and decided it would be a good post to share with you all. As always, I am here to present you with a clear and straight to the point explanation of this popular investing terminology.

Capital Gains

Capital gains is simply the profit made from your investments. For example, if you buy stock in a company for $20 per share, it goes up to $40, and you sell those shares, your “Capital Gain” is $20 per share that you sell.

There is also such thing as a Capital Loss – if you purchase shares of a stock for $40, it goes down to $20, and you proceed to sell your shares, your Capital Loss is those $20 per share that you sell.

I emphasize  “sell” because a capital gain or loss is not realized (doesn’t become “real”) until you actually sell your shares of the stock.

A capital gain or loss doesn’t become “real” until you actually sell your shares of the stock.

How Much Of Your Gains You Get To Keep will depend on how much you get charged in “Capital Gains Taxes”. Taxes are tied to two main things: 1. Your tax bracket and 2. How long you held your investment before you decided to sell.

Under current IRS regulations, most individuals that invest for the long term pay only 15% taxes (or less) on their capital gains while individuals in the lowest two tax brackets don’t pay any taxes at all! <– How awesome is that?!

Meanwhile, short term investors end up paying at least 20% in capital gains taxes.

Side Note: If you are wondering what tax bracket you fall into based on your own personal situation, check out this super informative article from Nerd Wallet (one of my favorite personal finance sites).

Some of you may be wondering what is the IRS definition of a long term or short term investment. Well, the IRS makes it quite simple:

If you buy a stock and hold it for longer than 1 year (could be a year and a day) you’ve invested for the long term. If you buy a stock and sell it within that same year, you have invested for the short term.

1 Year + 1 Day (or longer)= Long Term

1 Year or Less = Short Term

If you buy a stock and hold it for longer than 1 year you’ve invested for the long term. If you buy a stock and sell it within that same year, you have invested for the short term.

I should emphasize these tax rules only apply to the United States. I have a lot of international followers (which I love) but I know some countries don’t really “penalize” for short term investments like the U.S does. Make sure you check the tax rules applicable to your specific country.

You’d be surprised to know that long term tax “perks” not only apply to capital gains. The U.S IRS also offers certain loopholes when it comes to capital losses.  For example, if you are invested in a company for the long term and the investment turns out to be a poor one where you actually end up loosing money – some investors qualify to write off tax looses against any capital gains. And so, if you ever have a negative experience with a long term investment, there is some comfort in knowing losses can be offset. 

“Some investors may actually qualify to write off tax losses on their taxes against any capital gains.”

Here is he official language from the IRS website:

Limit on Losses.  If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.

In an upcoming post I’ll elaborate more on a different kind of capital gains – Dividends! This is actually a post that is ready to go and I am very excited to share so stay tuned for that. 

And finally, remember that I am not a tax accountant so always make sure you check with your tax professionals for any specific questions you may have applicable to your personal situation. This post has been written for educational purposes only. 

Questions? Comments? Anything you’d like to add? Share below and/or head over to the Facebook Group to join the discussion.

Cheers to profits!

Mabel $

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