Capital gains can be a bit confusing when to comes to how we pay taxes. It’s best if we think of them as a SEPARATE tax bill from the income taxes that we pay… because they are.

Almost any time you buy something as an investment, NOT in a retirement account (IRA, 401(k), etc.), you pay taxes on income received from the investment while you own it and will have a capital gain or loss when you sell it.

Let’s dive a little deeper…

In a simple example, if you buy $100,000 of ABC Company stock and it grows to $200,000 and you sell it, you will owe capital gains taxes (rate depends on length of holding and taxable income rate) on the $100,000 of gains. If ABC Company also paid a dividend throughout the year, you would treat that as income (even this depends on the type of stock which we aren’t going to get into here).

We actually think that Capital Gains are a GOOD THING. Unlike most retirement accounts, we can decide when we pay some of the tax bill that we owe AND we pay it as we go. When investments go down for whatever reason, we can also harvest them and lock-in the losses to offset future capital gains or you can write them off each year (2024 amount is $3,000).

Lastly, Capital Gains can offset each other across asset classes. A loss from selling ABC Company stock could offset the gains from a real estate sale. It gets a little tricky computing the short-term and long-term gains/losses together, but that’s what we are here for!

Next up: What Did Secure Act 2.0 Change for Inherited IRAs?

Disclosures

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.