What Is Capital Gains Tax and How Does it Impact You?

Most have heard the tax lowers overall investment return. It does.

Here’s exactly what this tax is and how it impacts your decision making.

The capital gains tax is a tax on the profit you make on investment returns.

When you buy a stock at $10 a a share and sell at $12, your pre-tax return is 20%. But then you’re taxed on that $2 per share gain, so your overall return is slightly less than 20%.

There are some ins-and-outs to all this.

First off, there’s the short-term capital gains tax an the long-term.

If you buy a security and then sell it in less than one year from when you purchased, your tax on the profit is higher than if you bought and then sold after one year, which would result in the long-term capital gains tax.

One principal of the gains tax: the higher your annual income is, the higher your capital gains tax is.

For short-term gains, the tax ranges from 10% to 37%.

For long-term capital gains tax, the range is 0% to 20%.

Now, to see how to work all of this in to your investment decisions, watch the quick video above.

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