Managing Short and Long-Term Capital Gains
Generally, the more income an investment generates, the higher the tax bill. But that doesn't always have to be the case. When comparing different investments to one another, the one leaving the most after-tax returns in the bank relative to the size of the investment is typically the most tax-efficient. When it comes to capital gains, investments generally fall into one of three tax categories: Tax-exempt or free, tax-deferred and taxable.
There are a couple of considerations regarding tax-efficiency to be considered:
Tax bracket: Tax-efficient investing is usually more important to taxpayers in the upper-income brackets.
Capital gain versus normal income: While capital gain taxes typically apply to investment appreciation and sale, income tax applies to whatever income that particular investment is generating.
Some tools to improve returns include:
- Timing a sale by understanding the difference between short-term and long-term gains
- Tax losses from the sale of one asset to offset the payable tax on another
- Tax-loss carry-forward
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