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Long Term Capital Gains Tax Rate

The length of time of the holding of a particular investment represents the major factor in determining the capital gains tax. As a rule, the longer you hold a particular investment, the lower the tax rate percentage you are going to be charged. This is done in order for the long-term investments to be encourages. As a result, the holding periods required to maintain in order to benefit from a certain tax rate is constant, whereas the rate itself is liable to change.

Therefore it is of high importance to distinguish between:

  • Trade date - this is the day at which your broker has sold or bought a particular investment, and
  • Settlement date - this is the day at which the actual transference of certificates has occurred.

Therefore, the trade date is the one that the government uses in order to determine the period of time during which you have held a particular investment.

Next we are going to examine the specific capital gains on assets held for:

  • Less than an year

    If you decide to withdraw the appreciated assets only a year after you have become their owner, then you will face the greatest percentage of capital gains tax. Usually, the capital gain tax will be calculated in the following way: earned income + capital gains = personal income rate. After this, the gain will be taxed at this rate. Unfortunately, the possibility of being charged a twice as much as a long-term investment tax is highly increased.

  • Between one and five years

    Long term investments are defined by the IRS as those assets that are held for more than a year. Generally, the capital gains tax has been set at 20%, but an exception is made for those of you who fall in the 15% tax bracket. Then, your capital gain tax rate will be considerably decreased. The more favorable tax treatment towards investments that were held for a longer period of time has triggered the trend toward buy-and-hold strategies of many value investors.

  • More than five years

    You are liable to an 18% capital gains tax rate only if your investment is done before January 1, 2001. An additional requirement that should be met is that the length of time you have held the investment should not be less than five years.

Impacts of Capital Gains Taxes

Capital gains taxes have a great influence on your investment in terms of the direction of your future financial decisions. As it can be seen from the previously provided information, the longer you hold an investment the more you benefit from lower tax rates. In order to make a clearer view of this, consider the following example:

Mary invests $50,000 in stocks. She falls in the 31.6% tax bracket. Unfortunately she needs the money for other purposes and sells the stocks ten months later with a 62% return. As a result she acquires $81,000. Therefore, she has gained $31,000 from which $9,796 should be deducted in the form of a capital gain tax. Finally, she ends up with a profit of $21,204.

Let's imagine that instead she finds another source to cover her emergency situation and waited just two more months leaving her $50,000 for a whole year in the stocks. She sells the stocks with a 55% return on the investment that is $27,500 capital gains. Having held the investment for a year, now she faces a lower tax rate and has to pay only $4,125. As a result she has a $23,375 profit.

As it was shown by the previous example, even though in the second case the return on the investment was lower, it was compensated by the lower tax rate, which was thanks to the longer time of holding the investment. Thus, capital gains taxes can have serious implications and effects on your investments.

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