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New to Investing? What to Know About Capital Gains

If you’re new to investing, you’ll want to know about capital gains taxes before your next tax return.
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What is a capital gains tax?

A capital gains tax is the tax placed on any profits that you made from selling an investment. It should be noted that this tax doesn’t apply to the amount for which you bought the investment. A capital gains tax only applies to the profit made. For example, if you purchased $500 in Gamestop stock, and then sold it a few months later for $750, you would only owe tax on the $250 you made in profits from the sale of the stock. In this case, your investment would have realized capital gains.

Other important terms
There is a list of terms that are often used when discussing capital gains. Here are the most common with which you should be familiar:

  • Realized capital gains: If you sold an investment and made a profit from the sale, then the profit you made and have received through selling has been realized; they’ve become a liquidized asset.
  • Unrealized capital gains: If you’ve made a profit from investing, but you have yet to sell the investment, then your capital gains are unrealized; they haven’t become liquidized yet.
  • Short-term capital gains: If the investment was sold within a year of purchasing it and you made a profit, then this is considered a short-term capital gain. You’ll often pay more in taxes on short-term capital gains than you would with long-term capital gains.
  • Long-term capital gains: If the investment was sold after at least one year of purchasing it and you made a profit, then this is considered a long-term capital gain. You’ll often pay less in taxes with long-term capital gains than you would with short-term capital gains.

By understanding these key terms, you’ll have an easier time in filing your tax returns.

Do I have to pay this tax with all of my investments?

No. You only have to pay a capital gains tax if you:
  1. Sold the investment, and
  2. Made a profit from the investment

If both of these statements are true, then you would be required to pay a capital gains tax. If only one of these statements is true, or neither of these statements are true, then you won’t pay any tax on capital gains. These investments are considered unrealized capital gains.

What types of investments have a capital gains tax?

The following list includes some of the most common investments that have a capital gains tax once the investment has been realized:

  • Stocks
  • Any house that you owned for less than two years--for a more in-depth review of capital gains on real estate, check out this article from Rocket Mortgage
  • Bonds
  • Vehicles

I have a variety of investments. Can I get help?

That’s why we’re here. If you have any questions about filing your taxes correctly, especially when it comes to your investments, we can walk you through the process. We’ll determine which documents you need to file, and we’ll look for the best deductions for you. Ready to get started?

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