When it comes time for taxes, it can seem a little intimidating as a new investor. Today I’ll explain just how capital gain taxes work and what you should be looking for.

As an investor, you’re responsible for paying taxes when you sell investments that have increased in value since you purchased them. This applies to mutual fund gains and dividends as well. 

There are 2 forms of taxes that apply to brokerage accounts. The 2 forms include long term and short term capital gains. The main difference between the two is the amount of time you held ownership of the stock. 

With short term capital gain taxes, the rate is based on the income tax rate you fall into that year. 

With long term capital gain taxes, the rate is 15%. If you fall in a tax rate above 15%, then leaving that stock for a year or more would be in your best interest. 

This principle also applies to mutual funds, index funds, ETFs, and bonds. It does get a little more complicated, however. To put it simply, if the fund manager decides to sell the investment you are still required to pay tax based on how long the investment was in the fund, even if it wasn’t you who sold the investment. You’ll receive some sort of record of this at the end of the year, so don’t worry about keeping up with it.

Now for the fun part! Let’s talk about tax loss harvesting. When it comes time to pay taxes, don’t forget to take a look at your portfolio! 

When you or your fund manager sells an investment, you realize the gain or loss you made on it. A realized gain comes after you sell and have taken the loss or gain from your investment. An unrealized gain simply means you haven’t sold the investment and there is a gain or loss in value since purchase. 

Gains and losses can offset each other if you strategically use tax loss harvesting. Look at anything you sold this year and what your total realized gain was. Look at your current holdings and see if any are at a loss, you can sell these to realize the loss and balance out your realized gain. 

There are a couple rules with this though. You can only buy a stock back 30 days after selling it, if not this is not a loss that qualifies to offset. You also cannot use stocks bought within the last 30 days to offset gains. 

I hope this helps you break down your portfolio and maybe even save a little when it comes time for taxes!