There are many different factors that you’ll need to consider when you begin to invest in stocks and trading opportunities for the first time. While it’s easy to get caught up in trying to work out what kind of stock is right for you, or how you can pick the best time to invest, it’s also worth noting that stock investment also has an impact on other parts of your life that you might not think about straight away. For instance, the way you file your taxes is bound to start changing when you’re trading in stocks, and you’ll need to consider how much capital gains tax you’ll have to pay at the end of each year. A stock trade simulator or educational course will only take you so far when you’re learning about stocks. You’ll also need to talk to your accountant, because as with any investment strategy, the best route for you will depend on your unique financial plan
How Much Capital Gains Tax Will You Pay?
Figuring out how much capital gains tax you’ll need to pay on your stock investments often comes down to considering the length of time that you’ve held onto a specific stock. The US government prefers to reward people who hold onto shares in American businesses for as long as possible. While the individual tax rates that you’ll need to consider will change with time, the holding periods that the government considers generally remain the same. That’s why it’s so important for investors to understand the value of their buy and sell date when investing in stocks.
How Time Affects Your Taxes
The appreciated assets that you hold for less than one year will receive the least favorable treatment from the government when it comes to capital gain tax. In most cases, the gain will be taxed at a personal income rate, which includes earned income combined with capital gains tax. On the other hand, the IRS considers any assets that you hold onto from your stocks for longer than a year to be a long-term investment. A long-term investment sees different treatment from the government. Congress reduces the capital gains tax rate for those investing in long-term assets.
Why it Pays to be Patient with Stocks
Patience has always been an important part of the stock trading process. Jumping onto a stock too quickly could mean that you end up paying a higher price than necessary for your new assets. At the same time, selling too fast could mean that you miss out on a huge investment opportunity. Of course, from a capital gains tax perspective, there’s also an additional benefit to holding onto your stocks for longer. The U.S. tax code gives advantages to U.S. investors who prefer to hold onto their investments for longer periods of time, which makes it easier to build your wealth and reduce the amount of money you give back to the government. The substantial reduction in capital gains tax is one of the main reasons why value investors prefer to take the buy and hold approach to investment.