Determining the tax rates that apply to those investments is a function of how long you have owned them. “For federal tax, the difference between short-term and long-term gains is whether the asset has been held for over one year continuously. The federal long-term capital gains tax is significantly lower than the short-term rate for most investors,” says Asher Rogovy, chief investment officer at Magnifina LLC, a New York-based investment advisory. For example, long-term capital gains are taxed at no more than 15%, while short-term capital gains are taxed at the rate you pay on your tax return—which can be significantly higher than 15%, depending on how much you earn. “Because the long-term rate is lower, investors who have held a profit for 11 months may consider waiting another month before realizing the profit,” Rogovy says.
“Capital gains are profits on tradable assets. For most households, taxable capital assets are securities (such as stocks and bonds), but may include real estate or even cryptocurrency. For federal tax, the difference between short-term and long-term gains is whether the asset has been held for over 1 year continuously. The federal long-term capital gains tax is significantly lower than the short-term rate for most investors. State tax rates vary (please consult with qualified tax professionals for specific advice). Because the long-term rate is lower, investors who have held a profit for 11 months may consider waiting another month before realizing the profit. If there are concerns about the price of the asset, sometimes it can be hedged with short-term Put options.
Tax is generally not withheld in investment accounts, so investors must be responsible to remember potential tax liabilities themselves. Some investors segregate their taxable capital gains into safer assets when reinvesting profits. Other forms of investment income, such as dividend yield or partnership income, is also taxable. Brokers typically send 1099 forms with the relevant information. Stocks organized as Limited Partnerships typically send 10-K forms. These forms usually arrive in the first quarter of the next year. For example, the forms with 2020 tax information might be received in Feb 2021. It is not uncommon for these forms to arrive very near or after April 15. Many investors are forced to file extensions to finalize tax preparation.”
