Justin Resuello shares how to save money, travel better and unlock the hidden value of cash back rewards, airline miles and hotel loyalty programs. Justin is a banking and investments industry veteran, enjoys writing about personal finance and is eag.
Justin Resuello ContributorJustin Resuello shares how to save money, travel better and unlock the hidden value of cash back rewards, airline miles and hotel loyalty programs. Justin is a banking and investments industry veteran, enjoys writing about personal finance and is eag.
Written By Justin Resuello ContributorJustin Resuello shares how to save money, travel better and unlock the hidden value of cash back rewards, airline miles and hotel loyalty programs. Justin is a banking and investments industry veteran, enjoys writing about personal finance and is eag.
Justin Resuello ContributorJustin Resuello shares how to save money, travel better and unlock the hidden value of cash back rewards, airline miles and hotel loyalty programs. Justin is a banking and investments industry veteran, enjoys writing about personal finance and is eag.
Contributor Michael Adams Investing EditorMichael Adams is an investing editor. He's researched, written about and practiced investing for nearly two decades. As a writer, Michael has covered everything from stocks to cryptocurrency and ETFs for many of the world's major financial publicatio.
Michael Adams Investing EditorMichael Adams is an investing editor. He's researched, written about and practiced investing for nearly two decades. As a writer, Michael has covered everything from stocks to cryptocurrency and ETFs for many of the world's major financial publicatio.
Michael Adams Investing EditorMichael Adams is an investing editor. He's researched, written about and practiced investing for nearly two decades. As a writer, Michael has covered everything from stocks to cryptocurrency and ETFs for many of the world's major financial publicatio.
Michael Adams Investing EditorMichael Adams is an investing editor. He's researched, written about and practiced investing for nearly two decades. As a writer, Michael has covered everything from stocks to cryptocurrency and ETFs for many of the world's major financial publicatio.
Updated: Mar 5, 2021, 10:47am
Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.
Getty
To paraphrase a famous quote, taxes are an unavoidable part of life—including when you invest. While taxes shouldn’t direct your investing strategy, they need to be part of your game plan.
“In short, what might appear to be a lucrative investment opportunity might not look as rosy after considering the tax implications of the transaction,” says Joshua A. Lowenthal, a tax attorney and estate planner based in Michigan.
Here’s how you can get to the bottom of investment taxes and make sure an investment is a good fit for you tax-wise—as well as what you can do to minimize any capital gains taxes.
When you sell investments—such as stocks, bonds, mutual funds and other securities—for a profit, it’s called a capital gain. When you file your annual tax return with the Internal Revenue Service (IRS), you owe taxes on the capital gains you’ve earned from selling securities.
There are two types of capital gains:
Because of this difference, “investors should be mindful of the holding period of their assets before deciding to sell,” says Carl R. Johnson, a certified public accountant (CPA) based in Louisiana.
Luckily, you don’t have to keep up with all your investments profits by hand. Federal tax laws require that investment companies disclose the investment income you’ve earned in a given tax year. If you have an online brokerage account, the company will provide you with tax documents, including 1099 forms documenting your annual investment income.
Usually, these tax forms are delivered between late January or mid February. After you receive your tax disclosures from your broker, you should work with an accountant or tax advisor to carefully examine and interpret them so that they are appropriately reported in your tax filings, says Lowenthal. If you hold international stocks in particular, you may want to work with a tax professional to help you manage any foreign and domestic taxes.
Unfortunately, both short- and long-term capital gains taxes are simply the entry price of playing the stock market game. If you hope to benefit from the historic substantial growth of the U.S. stock market, you’ll be hard pressed to avoid them entirely. That said, you may be able to minimize them a few ways: with retirement accounts, tax-loss harvesting and tax-exempt investments, like municipal bonds.
Retirement accounts like a 401(k) or an individual retirement account (IRA) can help you avoid capital gains taxes and potentially minimize your income taxes. Here’s how:
The goal of investing is to buy assets cheap and sell them high. However, not every investing choice you make delivers capital gains—losers are an inevitable part of the process. When you sell an investment for less than you paid for it, it’s called a capital loss. And tax-loss harvesting is your consolation prize for capital losses.
“Tax-loss harvesting benefits taxpayers by allowing them to put realized capital losses against realized capital gains. This practice offsets losses against gains to reduce or eliminate reportable gains,” says Johnson.
Let’s say you had a taxable brokerage account and you made a $60,000 investment in the hot stock of the day, GameStonk. Six months later, shares of GameStonk had declined in value by 10%, so you sold them at a loss for $54,000.
In this scenario, you have $6,000 in capital losses as a consolation prize. IRS rules let you offset $3,000 of short-term capital gains elsewhere in your portfolio or use some or all of that amount to offset other gains, from long-term capital gains to your job-based income. This can help minimize the amount of taxable income you have.
Tax-loss harvesting isn’t always so straightforward, but it’s a valuable part of your investing toolkit. Even if you don’t have long-term capital gains to offset this year, IRS rules let you use long-term capital losses to offset future gains down the road.
Forbes Advisor encourages you to seek professional advice from tax experts to help you optimize your tax strategy when it comes to investing. Licensed tax professionals can be invaluable advisors for determining capital gains tax scenarios you face, the reporting that will be required for any decisions you make and filing any appropriate documentation that the IRS may require.
