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“The hardest thing in the world to understand is the Income Tax.” -Albert Einstein
By Andrea Young on February 23, 2023
By Glenn Frank, MBA, MST- Director of Education
“The hardest thing in the world to understand is the Income Tax.”
-Albert Einstein
Accordingly, do your best to understand tax laws and have them work FOR you whenever possible. We believe you can minimize portfolio taxes without compromising the essence of your investment strategy. Unlike most forms of income, the timing of taxation on capital transactions is largely up to the investor. Regardless of economic gain, taxes are not incurred until investments are sold, and then, with proper planning, tax rates could be far less than the marginal rate on your earned income.
Schedule D Netting Process
The top half of Schedule D nets short-term, (investments held <1 year), realized gains against short-term realized losses/ short-term loss carryovers from the prior year. The lower half of Schedule D nets long-term realized gains plus capital gain distributions from investments against long-term realized losses/long-term capital loss carryovers from the prior year.
There are three possible outcomes from Schedule D:
- Net short-term gain and net long-term gain: short is taxed at your highest marginal tax rate and long is taxed at your capital gains rate, (0%,15%, 20% or 23.8%).
- Net short-term loss and net long-term loss: deduct up to $3,000 against other income and carry forward excess to the following year.
- Net short-term is different from net long-term: they net against each other to produce an overall net gain or net loss. A net gain is taxed per outcome (1) above, a net loss it is taxed per outcome (2). For example, a net short-term loss of $7,000 and net long-term gain of $16,000 will equal a net long-term gain of $9,000 which is subject to your long-term capital gains rate.
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