“Capital gains taxes” might sound like a complex financial term reserved for Wall Street tycoons, but in reality, they touch most investors and many homeowners.  

Whether you’re selling stocks, a piece of real estate, or that vintage baseball card collection, understanding capital gains taxes can help you make smarter decisions and keep more money in your pocket. 

At its core, a capital gain is the profit from selling an investment or real estate. If you buy an asset for $1,000 and later sell it for $1,500, you have a capital gain of $500.  

We can categorize these gains in two ways:

• Short-Term Capital Gains: Profits from assets held for a year or less are considered short term. These are generally taxed at your ordinary income tax rate.  

• Long-Term Capital Gains: Profits from assets held for more than a year are labeled as long term. They often benefit from a lower tax rate, which can vary based on your taxable income and filing status. 

Why does this distinction between short term and long term matter?

Because the tax implications can be substantial.  

For many taxpayers, long-term capital gains are taxed at a more favorable rate than short-term gains. Thus, holding an asset for a bit longer (say, 13 months instead of 11) can lead to a significantly lower tax bill.  

Tax planning is an integral part of an investment strategy, so always look at the net profit (after taxes) when considering a sale.  

There are some exemptions and special rules for capital gains taxes. A notable example is the sale of your primary residence.  

If you meet certain requirements, you can exclude up to $250,000 ($500,000 for married couples filing jointly) of gains from your taxes. However, this doesn’t apply to rental or second properties. 

Wait it Out: As mentioned, holding onto investments for more than a year moves them into the long-term category, often resulting in lower taxes.

Tax-Loss Harvesting: This involves selling securities at a loss to offset capital gains in other areas. It can be a strategic move, especially in a down market. Review this article on tax-loss harvesting for more information. 

Gift Assets: Instead of selling assets, consider gifting them. While there are limits, this can be a way to transfer value without triggering capital gains taxes. See this article on gifting stocks for an example.  

Maximize Tax-Advantaged Accounts: Utilize accounts like 401(k)s or IRAs, where investments grow tax-free or tax-deferred.  

Stay Updated: Tax laws can change. Ensure you’re up to date on the latest rules and rates, or rely on an advisor to keep you informed.  

Remember, it’s not just about what you make but also what you keep. A proactive approach today can lead to fruitful savings tomorrow. 

To learn which tax minimization strategies will work for you, reach out to an advisor at [email protected] or fill out the form below.  

Source: “Understanding Capital Gains Taxes and Planning.” FMeX. 2023. 13258.pdf (fmexcontent.s3.amazonaws.com)