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November 12, 2006 Short Term vs. Long Term Gain There are implications to short term gains that you don’t see with long term gains. First off, what is considered short and long term? What we are really talking about is how your gains or losses are taxed, and the holding period of your assets. According, then, to the government the long term holding is a period of at least one year, and short term is anything less than that. How does that affect the taxes you pay? If you hold for short term your gain is taxed at the same rate as your income (see table below) If you hold for long term the rate is substantially less. (Disclaimer, I am not a tax expert, so consult your accountant to get your exact rates. That being said, the table below is a general example of what I am talking about)
The next thing to be said is that your actual gains are only taxed if they are realized. I have written about this before, distinguishing between gains/losses on paper and in actuality. Paper gains are not taxed whatsoever. To dive just a little further into that, unless you actually sell a stock, gains or losses do not count toward your tax base. Now to get back to the short vs. long term, if you buy 1000 shares of company A for $10 each and 364 days later you sell them for $20 each (hey, why not have a meaty big gain example?) the gain you realize is $10,000. If you are in the 28% tax bracket, the tax you would pay on that would be (gulp) $2,800. (28% of $10,000) If you were to hold that for 365 days the tax rate would only be 15% and Uncle Sam’s cut is (smaller gulp) $1,500. Now I know the tax tables might not be universal, and might not be accurate today. (Maybe they were yesterday and maybe again tomorrow) but the point is that the USgovernment encourages long term holding by giving this lower long term tax rate. The other effect that this has is to potentially rob you of the power of investing, if you don’t immediately re-invest the money you got from the realized gain. To get the most out of your investment, your money has to be working for you full time, not part time, so you want to keep the ‘cash’ in your investment funds low, and have it working for you by being in your stocks, mutual funds or whatever investment you choose. Although your cash balance still earns interest (probably) the interest rate is definitely less than what you hope to earn with your investment selections.
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Want a scholarship into the Millionaire Mind Intensive worth $2590? http://www.secretsofthemillionairemind.com The columns, articles, message board posts and/or any other features provided on Wealth Training Source are provided for personal finance and investment information and are not to be construed as investment advice. Under no circumstances does the information in this content represent a recommendation to buy, sell or hold any security. The views and opinions expressed in an article or column are the author’s own and there is no implied endorsement by Robert Britt of any advice or trading strategy copyright Robert E. Britt 2006 |
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