Please explain to me in layman’s terms what capital gains taxes are and if there is a way to get around them at all legally. Thanks! – Henry
Capital gains occur when the shares of a personâ€™s stock appreciate in value. The monetary difference between what the shareholder originally paid and the value of the shares when sold are the capital gains.
For example, at the beginning of 2003, Henry purchased 100 shares of Exxon Mobil (no investment recommendation intended) for $25 apiece. At the end of 2006, Henryâ€™s shares are now worth $75 each, resulting in an increase of $50 per share. Because of his investment acumen, Henry finds himself with $5,000 ($50*100 shares) in capital gains.
To answer the second part of the question, there are a couple of scenarios where one can reduce the tax burden. The first involves holding shares for over a year in order to pay the current capital gains tax rate, which ranges from 5% to 28%. If a person decided to sell his shares after only three months, he would pay capital gains at his current income tax rate, which is usually significantly higher than the capital gains rate. Click here for more information about capital gains.
The second way to reduce the tax burden is by offsetting the gains with the sale of shares that currently have unrealized or paper losses. Selling your â€œlosersâ€ during the same year you sell your winners will help offset the tax liability. However, be careful not to sell a stock that has decreased in value solely to help offset capital gains. This advice is especially true if the company that currently has a paper loss has bright prospects for future gains!
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