When it comes to taxes, it makes a big deal how long you’ve held your investments. If you’ve held your investments for over a year before selling, you are taxed at the long term capital gains tax. If you’ve held them for less than a year before selling, you’re taxed at the short term capital gains tax. The two tax rates are very very different.
To calculate how much your tax is, you first have to figure out which tax bracket you’re in. Here are the 2008 tax brackets.
Short Term Capital Gains Tax
This is easy, your gains are taxed at your tax rate as ordinary income.
Long Term Capital Gains Tax
If you are in the 10% and 15% tax brackets, you pay 0% in long term capital gains tax. If you are in the 25%, 28%, 33% or 35% tax brackets, you will pay 15% on your long term capital gains.
By waiting a full year, you can save quite a bit on capital gains taxes… but don’t let tax considerations by your main reason for buying or selling stocks. You’ll get yourself in deep trouble that way. 🙂
The Carnival of Personal Finance is now available at Mpolanomy, my TradeKing review was included.