Now this is some interesting stuff. Use this tab at your own risk and make sure you know what you are doing before messing with the IRS or SEC. If a Summons or Subpoena shows up on your doorstep.... it is not my fault. A lot of sites just talk about long-term investing and tax-advantage accounts (I will as well), but I will also talk about all the actually interesting ways that will have your partner wondering if you are going to prison (You won't, just do your research and be responsible).

Capital Gains Tax

Every investor has to deal with these, and this is why I hate day trading because of how high the CGT is.

Firstly, you earn a capital gain when you sell an investment or asset for a profit. When you realize a capital gain, the gains are considered taxable income.

The amount you owe in capital gains taxes depends in part on how long you owned the asset. Long-term capital gains taxes are paid when you’ve held an asset for more than one year, and short-term capital gains apply to profits from an asset you’ve held for one year or less.

‍Short-term capital gains are taxed at ordinary federal income tax rates — 10%, 12%, 22%, 24%, 32%, 35%, or 37% — depending on your filing status and income. However, you’ll pay a tax rate of 0%, 15% or 20% on gains from the sale of most assets or investments held for more than one year. So, try and hold for a year or more.

For example, if you’re filing as an individual, you can earn taxable income of up to $47,025 in 2024 and qualify for the 0 percent rate.

Tax-Advantage Accounts

Accounts such as a 401(k) and IRA provide tax benefits and savings for retirement (talked about in retirement tabs)

The Fun Stuff

Tax-loss harvesting.

       To understand this, you have to understand what a tax write off is. A write-off is any legitimate expense that can be deducted from your taxable income on your tax return. When you file your tax return, the IRS uses your reported income minus your tax deductions (or tax-write offs) to determine what tax bracket you are in and the tax rate your taxable income will be taxed. 

Ex. When you file your taxes, your reported income is $50,000. With the standard deduction ($14,600 for a single for 2024), your adjusted gross income would be $35,400 for 2024. The standard deduction will lower your reported income and in turn, lower your taxable income and your tax rate.   

NOW the IRS allows write offs for certain trading losses, meaning selling can offset some capital gains. 

Ex.

• Stock A has 100 shares you bought at $90 per share, totaling $9,000
• Stock B has 100 shares you bought at $250 per share, totaling $25,000

Stock A’s price drops to $40 due to market volatility (now worth $4,000). Meanwhile, Stock B has increased in value and is now at $370 per share (now worth $37,000). 

If you sell all of your stock shares, you have a $5,000 loss and a $12,000 gain. But since you sold them in the same tax year, you can net the two, leaving you with a $7,000 gain. This reduces your overall tax liability, so you owe less taxes and might even drop into a lower tax rate. Stock B's performance means a gain of $12,000 and on top of median American income of 40,480 = $52,480 yearly income and a tax of 15% for long term investing.

However, since selling Stock A reduces total gains to $7,000 for a total income of $47,480, you fall into the 0% capital gains tax bracket and wouldn’t owe anything on long-term gains. 

The IRS will look into your investment history and to many buys and sells of identical stocks in 30 days (Wash Rule) will raise flags.

Cost Basis Advantage

       Leveraging your cost basis can be a strategy to minimize capital gains taxes if you’ve bought shares of the same stock at different times and prices. For tax purposes, your cost basis is the original value of your stock adjusted for stock splits, dividends, and return of capital distributions.

Ex.

1. purchase 1 bought at $10 per share in 2020.
2. purchase 2 bought at $20 per share in 2021.
3. purchase 3 bought at $25 per share in 2022.

As of today, each stock is worth $30 per share. Selling from the first lot gives you a capital gain of $20, from the second lot a capital gain of $10, and from the third lot a capital gain of $5. 

By selling shares from Lot 3 when the purchase price was the highest, your capital gains tax liability will be significantly lower than Lot 1 or Lot 2.

This sounds simple but requires a lot of planning and understanding the law. The wash rule applies here as well and do not do this without careful planning.

Security Based Loans