Paying Taxes on Investment Earnings | What You Should Know

Paying taxes on investment earnings
Spread the wealth!

Benjamin Franklin once said, “In this world, nothing can be said to be certain, except death… and taxes.” He was absolutely right. No matter where you live on the globe, there will always be taxes on something, and paying taxes on investment earnings is something that takes place in every part of the globe.

As citizens or residents of the United States, paying taxes is something all of us have to do every year as individuals, or jointly if filing with a spouse. But even though we all pay taxes, it doesn’t mean we can’t legally make tweaks to minimize what we owe. There are many wealthy people today who can legally minimize their tax owing every year. All they do learn their tax laws and prepare for tax season.

As taxpayers, it should be expected that everyone conducts proper tax planning so that we can preserve our assets as much as possible.

Doing this is a challenge for most people though. Most people need something quick and simple to follow so that they can have an easier time preparing for tax season. Or they will simply have someone else do it for them. If you’re someone that cannot afford to have someone do it for you, you are probably looking for some quick and easy solutions to maximize the preservation of your assets, and minimize your tax liability.

If you are an active participant in buying stocks, bonds, and mutual funds, read on. In this article, I will be going over 5 simple tax strategies that you can follow to keep as much of your assets as possible.


#1 Review Your Gains & Losses

From January 1st to December 31st of every year, there will be multiple investment transactions that will have tax implications. As an investor, you need to be aware of which transactions can cause implications and which don’t.

To do this, and to ensure that you have paid off enough estimated taxes to cover any short-term capital gains or even long-term, you must review your gains and losses for the given year. Keep note of all the transactions that took place and which of your gains and losses were realized throughout the year.

A year-end review can help you plan for the potential of the Alternative Minimum Tax (AMT) as large capital gains can trigger AMT liability.

What is AMT liability? It applies to taxpayers with high economic income, it sets a limit on benefits that significantly reduce a taxpayer’s regular tax amount. It helps to ensure that those taxpayers pay at least a minimum amount of taxes on their assets.

#2 Sell at a Lower Marginal Tax Rate

An investment that increases in value while paying no income to you (such as dividends) is not taxed until it has been sold. Some dividend-paying assets are taxed as regular income every year, even if you haven’t sold your investment.

If the value of your investment is going up, you should practice patience… a lot. It would be ideal for you to wait to sell it until the year at which your marginal tax rate is lower than what it currently is. For most people, this is retirement. Since they are no longer receiving regular earned income, their marginal tax rate could definitely be lower!

If you are expecting to have a lower marginal tax rate at retirement, do everything you can to hold off selling your investments until then.

#3 Offset your Gains with your Losses

If you cashed in a significant amount of gains during the year, review your portfolio for any unrealized losses. Once you find these losses, analyze their price and intrinsic value to determine whether that investment is likely to rebound or crash.

If your investment has a low possibility of rebounding and thus crashing, sell it! Use the losses of those assets to offset the gains you’ve made during the year. If you take part in capital gains harvesting (which will be discussed in further detail in the next section of this article), you can also use your losses to offset your gains.

More than likely though, you won’t be as eager to do it, as capital gains harvesting saves you a lot of money on taxes. This leads me to the next point.

#4 Long-Term Capital Gains

You have probably seen “long-term capital gains” so many times throughout this website. This is only because it is so effective at saving people a lot of money in taxes.

Remember that term, “capital gains harvesting”? It is the process of turning unrealized long-term capital gains into realized capital gains at a specific time for tax purposes. When you buy and hold an investment for at least 1 year and 1 day, you can take advantage of long-term capital gains tax treatment on your returns.

There are two types of capital gains taxes. There are short-term capital gains and long-term capital gains.

Short-term capital gains are profits you make from selling an investment before a 12-month period. They are taxed at your regular marginal tax rate for the given year.

Long-term capital gains are profits you make from selling an investment after a 12-month period. These are taxed much more favorably and are only taxed at a 0%, 15%, or 20% rate. The rate depends on your earned income.

The tax rates for long-term capital gains are as follows for the year 2020:

  • 0% – $0 to $40,000 income
  • 15% – $40,001 to $441,450 income
  • 20% – $441,451 or more income

When you wait to sell your investments until they qualify as long-term capital gains, you maximize the savings on those gains. And you will only be taxed at one of the three rates listed above.

#5 Look for the Right Investments

Most investors are passive in their investing practices. They have many things going on in their lives and don’t have time to conduct all the fundamental analysis that is necessary to pick their own stocks and build their own investment portfolio.

Passive investors like to invest by using vehicles like index funds or mutual funds. If you’re specifically looking for a vehicle that is professionally managed by licensed professionals, you want to invest using mutual funds.

Although you have no control over the timing of sales within the mutual fund you choose, you can still choose the right mutual fund that gives you the most advantages. Look for mutual funds that potentially consider certain tax advantages and savings strategies.

Although you may be a passive investor, there still needs to be some level of work on your part if you want to make the right choices on what you put your hard-earned money into. It won’t be as much work as an active or enterprising investor, but it required work that you can’t get around. Don’t worry, it will pay off for you in the long-run.


Conclusion

Investing is a fun but risky game. You are putting your hard-earned money into something that should be going up in value, but it isn’t guaranteed. Nonetheless, if you make the right decisions, your investments will surely be going up.

But just because the value of your investment is climbing, it doesn’t mean that all that money will be yours in one go. Taxes will take a big bite of those gains, but you have the power to strategize accordingly and minimize what Uncle Sam can take from you.

You’re growing your assets, make sure to keep as much of them as possible. Don’t let taxes take more than they should from you. You have great examples like Warren Buffett who prove that with the right strategies, you can keep the largest sums of your hard-earned money all to yourself.

If you’ve made it to the end of this article, leave a comment below, and let me know how implementing these five tips has helped you this tax year.


Spread the wealth!

Recommended Articles

28 Comments

  1. A very useful article for all those who want to start investing. Every job carries risk with it. There are people who invest and risk their labor and money and manage to cope with all the problems. You should listen to the advice of such people based on the smart moves that they made during their investment in their business.

    1. Thank you for your feedback! And yes, listening to those with experience is a wise say.

  2. This is something that I didn’t know before now but it is so good to learn about it and also about how to be able to pay taxes correctly as well. I’ll be taking your advice for the coming tax year and I hope to save a lot. I have started investing and I understand now what I have to do about my investments’ taxes. Thanks!

    1. Of course 🙂 glad this could help

  3. You have some very good information here about taxes on investments earnings. I like how you explain the five simple tax strategies. To be honest, it is scary to earn on any investments when people don’t know how to use the advantages to limit their payments on taxes. This article will definitely help. I appreciate it. Thanks.

    1. Of course! Very happy to hear it was helpful 🙂

  4. Five great tips for saving on taxes on investment returns, although hopefully tax rates everywhere would be lowered by governments due to the Covid-19 situation all around the world.

    One thing I’ve always wanted to know, but never really spend the time to go find out, is what the tax rates on bitcoin and other cryptocurrencies are. Are they even taxable? Would you have any ideas on that?

    1. Great question! I talk about this in my cryptocurrency article! But yes, there are certain regulations is must follow under tax guidelines.

      One of the most important pieces of regulatory guidance comes from Notice 2014-21 of the IRS. In summary, it states that cryptocurrency is seen as property for federal tax purposes and falls under general tax principles. Gains and losses are acknowledged by the IRS and are taxed accordingly.

  5. Taxes on Investment Earnings is a subject of which only few people has knowledge about. Recently I received a call from a bank I worked for(long time ago). They told me that under a federal law (ERISA law) I have made no deposits for a long periodof time, and the balance is less  than $5,000, it will be paid on a single pay, immediately.

    In the USA, there many types of these accounts, most of them for “retirement”: IRA, Roth-IRA, 401K, Mutual Funds and many others. These accounts have different grades of risk, depending on the amount of risk you want to put your funds to get considerable earnings or large amount of them. The more you risk, more you can earn and/or loose. All of these accounts work like bets in Las Vegas. The most common markets in USA are Dow Jones Industrials 30, NASDAQ, Stardards & Poors 500 in New York City, and Russell 2000 in Chicago.

    Not always Investments go up. In October 7, 2007, all markets around the World crashed. From USA, Mexico, Japan (Nikkei), Germany(DAX), London, and also Brazil (Bovespa). My account balance downed $4,000 on a single day, and have doubled the remaining balance of 2007, Now with the pandemic, markets are not working well.

    1. Thank you for your feedback 🙂 And while it is a risk to invest your money, I wouldn’t necessarily say that it’s the same as bets in Las Vegas. There is a calculated level of risk that you can make and there is fundamental analysis that you can make of what you’re investing in. It’s not quite the same. But if you’re just making random investments into random shares of things that sound like they’re going up… then yes, it is the same. But that’s not investing, that is speculation. While the value of your investments may not always be going up, history has shown us that in the long run, the markets do not cease to impress us

  6. I find this article to be of great value and importance. I am not an investor, but I have read a few things about investment intoto. It is nice to get to know what one should do to pay taxes on investment earnings. Payment of taxes is very important, and regardless of how they are been spent or put to use by the government, it is advisable that one pays his or her task when due.

    1. Hi Kelvin, I appreciate your feedback! I am glad that you learned something new from this article. Remember that it’s never to late to start investing, and there isn’t much you have to do on your end to start, other than finding the right people to help you. Having a safe retirement is highly dependable on investing. The sooner the better! Let me know if you ever do get into investing and if you have any questions

  7. It was an interesting article. I will bookmark it and when it is time for me to look over my yearly taxes I will review these suggestions, I am not an US citizen but the basic is almost same in Sweden where i pay my taxes. I saw that you also have a menu for crypto currencies on your page and will look into that later. I am sure I will get good information there based on how you explained how to Paying Taxes on Investment Earnings. All the best. Goran.

    1. Hi Goran, I really appreciate your feedback and I’m happy to hear that you’ve found value in this website. I will continue to post more valuable and helpful content for my audience. I’m glad to hear you’ll come back to it when you’re paying taxes. It’s an honor to have someone from Sweden here. 🙂

  8. firstly nice work on this article, i really like the set up, the color, the pictures .thanks to this article i have learnt a few things on investment earnings .things like ;gain and losses, right investment ….these are things one should know when investing in something. well for me investing is kinda a 50-50 win for me they may be losses, they may be gains, by the key is to be smart and know what you are going for.

    1. Thank you! I’m glad the set-up was pleasing!! I’m glad you’ve learned a few things from this article. Investing is a risky business but it doesn’t necessarily 50/50 all the time, if you choose the right type of investment and the right type of fund to start investing, it can actually be very lucrative and you can be assured that your initial investment will be safe! Take a look at this article if you are curious about investing but don’t want to necessarily get into the nitty-gritty part of choosing the right stocks or bonds, or commodities, etc. Funds are a great option to start out. But if you haven’t necessarily started investing, I also recommend my article on What To Do Before You Start Investing. It will be a good way to start! I appreciate your feedback!

  9. Hello there, thanks a lot for sharing this beautiful piece of information here with us. I must say i really did enjoyed going through your review as it contains valuable informations one needs to be aware of. investment is indeed very risky but when you start making returns you forget about all the risk taken. These steps given here has really helped me in understanding better how taxes on investment works and although I’m yet investing, I’m looking forward to it. 

    1. I’m glad to hear this was helpful 🙂 let me know if you have any specific questions once you start out!

  10. Hi Misael,

    i have to point out how you make financial talk understandable. Usually reading this kind of article, I will end up loosing inters. But you have made it tangible for me even if I am not an expert investor. I do think Tax can be minimised eve for us low-income earners. It just that we have to learn how. We do quickly try to get someone to do this for us and usually it might not be to our benefit.

    How do you know that the person you have employed will look after your best interest?

    I still feel it would be much easier to get someone to do my Tax.

    Thank you for yet another great article.

    Ntlhane Ratlhagane 

    1. I’m glad to see you surf around the site! 🙂 regarding your question, just make sure to do your due diligent research on the person you’re hiring to do them! It’s all relative to where you reside and who you think would be better or the best in your designated area. Thank you so much for your feedback 🙂

  11. Wow…. I’ll say this is an amazing article on paying taxes and thanks for this. I thought I knew more about taxes until I read this and I’m very grateful for this. I’ll advice everyone gets to read this and understand the importance of taxes to the growth and development of an investment. Thanks once more

    1. Glad to see you surfing around the website! I’m gad this was helpful 🙂

  12. Thank you for delivering such an outstanding lecture online through the help of this your website,  here about taxes on investments earnings. I like how you explain the five simple tax strategies. To be honest, it is scary to earn on any investments when people don’t know how to use the advantages to limit their payments on taxes. This article will definitely help. I appreciate it. Thanks.

    1. Hey, thank you for the feedback! Glad this was helpful!

  13. Hello, thanks a lot for sharing this beautiful piece of information here with us, it is very helpful. I’m a businesses owner myself but have never really figured out how taxes work, reading this gives me more in-depth knowledge about taxes, I will bookmark this page so that I could be able to follow the steps and audit my account.

    1. Taxes are extremely important as a business owner so I’m glad you’ve run into this article! Let me know if you ever need anything, email me at support@thenerdfinance.com

  14. Payment of taxes is something I place much importance on. I am a beginner when it comes to investment and barely have much knowledge about it. So reading this article has been very helpful for me as I have been able to learn about what paying taxes from investment earnings is all about. With this knowledge, I’d be sure if doing the right thing with regards to paying taxes and my investment earnings.

    1. I’m very happy to hear that this was helpful! Let me know if you ever have any questions at all!

Leave a Reply

Your email address will not be published. Required fields are marked *