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Let’s play a game called Taxes Hold‘em
Taxes can have a big impact on your investment portfolio and affect how quickly you achieve your financial goals. As an investor, if you simply hold your investments (that is, you do not sell/withdraw any or all of them), any increase in their value is considered "unrealized," meaning you won’t be taxed on these increases. Taxable events can occur when you sell all or part of an investment and “realize” (i.e., take home!) the gains in the process. These are called realized gains. Of course, it’s also possible to have realized losses.
Other taxable events include receiving dividends and interest income from your investments. How much you’re taxed by Uncle Sam depends on how long you’ve held the investment and the current tax rate for your tax bracket. As always, it’s important to consult an expert when considering taxes.
All gains are not taxed equally
One of the most important considerations that investors need to be aware of is whether they will generate short-term or long-term gains when selling assets, because the two are taxed differently. Short-term gains are taxed as ordinary income and are subject to your current income tax bracket, which can be as low as 10% or as high as 37% for the highest earners.
The tax rates on long-term capital gains are significantly reduced based on your income bracket, and are taxed at either 0%, 15%, or 20% for 2018. In order for a gain to be considered long term, you must hold the investment or security for more than one year before you sell it. It’s important to seek expert advice when considering the tax implications of your investments.
Nothing but net (only net gains are taxable)
It’s important to note that only your net gains are taxable. For instance, if an investor has a long-term gain of $500 on one asset and a long-term loss of $250 on another asset, the taxable amount is $250. Also, if there is a net loss, the investor can deduct up to $3,000 on their current tax return and carry forward additional losses. Any losses that you’re not able to use to offset gains in a calendar year can be used to offset gains in future years (up to a certain amount). Consider consulting a tax expert when carrying over losses.
Timing is everything
It’s also important to note that you’re only taxed immediately (the current year’s tax bill ) for investments held in taxable accounts. Assets held in tax-deferred or tax-exempt accounts, as their names suggest, may not require you to pay taxes until you begin to withdraw in retirement (e.g., 401(k) plans) and traditional IRAs) or may not require you to pay taxes at all (e.g., Roth IRAs). Thus, deciding in which accounts to make which investments may have an impact on your overall tax bill, now and in retirement. Consider that your tax bracket at retirement may be less than your tax bracket now, which may be another important benefit of tax deferral.