Trading tax: Capital Gains Strategies

Trading tax: Capital gains strategies
and education to keep more profits

Whether you’re an investor or trader, understanding the impact trading tax

is essential. While the Capital Gains rules are complicated, using them to your advantage can significantly cut your trading tax bill. Capital gains are simply the profits you make from the sale of stocks. If those stocks have been held longer than a year, the resulting profit is considered long-term capital gains. Any profits from stocks held less than a year are short-term. Knowing the difference between those two categories is essential and keeping track of your long and short term trades in your journal or tax program is imperative since each has its own tax rate.

The long-term capital gains rate is 5% in the 10-15% tax bracket and 15% otherwise. Short-term capital gains are taxed the same as ordinary income. As an example, investor Joe’s taxable income is in the 15% tax bracket and he’s $5,000 shy of entering the 25% tax bracket. During the year he sold stock he’s been holding for two years and made an $8,000 profit (long-term capital gains). The first $5,000 falls within the 15% bracket and will be taxed at 5%. The remaining $3,000 will be taxed at 15% since the profit income realized from the stock sale pushed him into the 25% bracket.

In the above example, he did not have capital losses to offset the long-term capital gains. If he would have had a $3,000 long or short term loss within the same year it would have offset the $3,000 long-term capital gains, and kept him out of the higher bracket. Keep in mind though; an investor can only deduct a maximum of $3,000 of losses in any one year.

Just having capital gains strategies can
reap huge trading tax savings

As traders and investors we do our homework and plan for each trade. We’ve also developed a trading plan and follow it to the letter, but it’s just as important to plan for the impact of our capital gains and losses.

One strategy involving trading tax is to hold your stocks longer than a year in order to gain the favorable long-term tax rate. If however you have both long-term and short-term capital gains within the same year, it may be beneficial to a loser before it becomes long-term. For example, an investor has $3,000 of short-term capital gains and $3,000 of long-term capital gains during the current year. Within the investor’s portfolio there’s also a stock that has gone down by $3,000, which will be a loss. In this instance you would want to sell the losing stock as a short-term loss to zero out your short-term gain. This is an excellent tax strategy because of the higher tax rate for short-term gains

We’ve only scratched the surface of a complicated subject in this article, but for more information, we recommend turning to a qualified trading taxes advisor such as Traders Accounting. Not only can they answer your questions, they can teach you some tax secrets that save traders thousands of dollars every year!

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