A Practical Explanation Of How Investments Are Taxed

Company stocks are taxed differently than other investments, such as bonds or mutual funds. When you sell stock, you may owe capital gains taxes. These taxes are based on the difference between what you paid for the stock (your cost basis) and the price you sold it for. If you held the stock for less than a year, you’ll pay short-term capital gains taxes. These are taxed at your marginal tax rate, which is the rate you pay on your last dollar of income. If you held the stock for more than a year, you’ll pay long-term capital gains taxes. These are typically lower than short-term capital gains taxes and are taxed at a maximum of 15%.

If you have stock options, you may also owe taxes when you exercise those options. When you exercise an option, you’re essentially buying the stock at the strike price. If the current market price is higher than the strike price, you’ll have a capital gain. This gain will be taxed at your marginal tax rate if you hold the stock for less than a year. If you hold the stock for more than a year, it will be taxed at the long-term capital gains rate.

Bonds are loans that you make to a company or government. In exchange for loaning your money, they agree to pay you interest over time and return your principal (the amount you loaned) when the bond matures. Municipal bonds are a type of bond issued by state and local governments. Interest from municipal bonds is typically exempt from federal income taxes, and may also be exempt from state and local taxes if the bonds are issued in your state of residence.

Exchange-traded funds (ETFs) are a type of investment that is similar to a mutual fund. ETFs are traded on stock exchanges and can be bought and sold throughout the day. Like mutual funds, ETFs pool money from many investors to purchase a portfolio of stocks, bonds, or other securities.

Restricted stock units (RSUs) are a type of compensation that companies may give to their employees. RSUs are similar to stock options in that they give you the right to purchase shares of the company’s stock at a later date. However, with RSUs, you don’t have to pay anything to exercise the option. Instead, the shares are typically given to you at the vesting date. If you hold the RSUs for more than a year, they will be taxed at the long-term capital gains rate. If you hold them for less than a year, they will be taxed at your marginal tax rate.

Real estate investment trusts (REITs) are a type of investment that specializes in owning and operating income-producing real estate. REITs can own a variety of property types, such as office buildings, shopping centers, apartments, warehouses, and hotels.

When you invest in a REIT, you’re essentially buying shares of the trust. The trust then uses the money to buy and operate income-producing real estate. REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends. These dividends are typically taxed at your marginal tax rate.

If you own rental real estate, you’ll owe taxes on the income you earn from rent. Rental income is typically taxed at your marginal tax rate.

You may also be able to deduct expenses related to your rental property, such as repairs, mortgage interest, and property taxes. These deductions can offset some or all of the income you earn from rent, reducing the amount of tax you owe.

If you sell a business, you may owe taxes on the proceeds. The amount of tax you owe will depend on how much profit you made from the sale and what type of business it was. For example, if you sold a sole proprietorship, you’ll pay taxes on the profit at your marginal tax rate. If you sold an S corporation, you’ll pay taxes on the profit at the capital gains rate.

Cryptocurrency is a type of digital asset that uses cryptography to secure its transactions and to control the creation of new units. Cryptocurrency is decentralized, meaning it is not subject to government or financial institution control. Bitcoin, Ethereum, and Litecoin are all examples of cryptocurrency.

When you buy or sell cryptocurrency, you may owe taxes on the gain or loss. The amount of tax you owe will depend on how long you held the cryptocurrency and what your marginal tax rate is.

If you have an investment within a retirement account, such as a 401(k) or IRA, you will not owe taxes on the gains from that investment until you withdraw the money from the account. When you do withdraw the money, it will be taxed at your marginal tax rate.

Dividends are distributions of a company’s profits to its shareholders. Dividends are typically paid out quarterly. When you receive dividends, you may owe taxes on the income. The amount of tax you owe will depend on your marginal tax rate.

Qualified dividends, which are dividends paid by U.S. companies or certain foreign companies, are taxed at the long-term capital gains rate. Non-qualified dividends, which are dividends paid by other types of companies, are taxed at your marginal tax rate.

You may also owe taxes on dividends if they are paid into a retirement account, such as a 401(k) or IRA. When you withdraw the money from the account, the dividends will be taxed at your marginal tax rate.

Interest is the money you earn from lending your money to someone else. When you receive interest, you may owe taxes on the income. The amount of tax you owe will depend on your marginal tax rate.

You may also owe taxes on interest if it is paid into a retirement account, such as a 401(k) or IRA. When you withdraw the money from the account, the interest will be taxed at your marginal tax rate.

Capital gains are profits from the sale of an asset, such as a stock or bond. When you sell an asset for more than you paid for it, you have a capital gain. If you sell an asset for less than you paid for it, you have a capital loss.

If you have a capital loss, you may be able to use it to offset capital gains. For example, if you have a $1,000 capital gain and a $500 capital loss, your net capital gain would be $500. You would only owe taxes on the $500.

If you sell an asset for a loss and then buy it back within 30 days, the IRS considers this a wash sale. A wash sale occurs when you sell an asset for a loss and then buy it back within 30 days. If you have a wash sale, you cannot use the capital loss to offset capital gains.

If you sell a collectible for more than you paid for it, you may owe taxes on the gain. Collectibles are taxed at your marginal tax rate.

Examples of collectibles include:

-Stamps

-Coins

-Art

-Furniture

-Cars

Investments are taxed in a variety of ways, depending on the type of investment and how it is held. It’s important to understand the tax implications of your investments before making any decisions. If you’re looking for a way to avoid capital gains taxes, consider investing in a retirement account or a tax-advantaged account such as a 529 plan. Be sure to consult with a tax advisor to ensure you are taking advantage of all the tax breaks available to you.

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.