skip to Main Content
How To Pay Less In Taxes On Your Investments

How to pay less in taxes on your investments

The current federal income-tax rates on long-term capital gains recognized by individual taxpayers are still low by historical standards. The rates range from a minimum of 0% to a maximum of 20% depending on your tax bracket. But the rates on short-term gains aren’t so low. They currently range from 15% to 39.6% for most investors. That’s why, as a general rule, you should try hard to satisfy the more-than-one-year holding period requirement for long-term gain treatment before selling winner shares (worth more than you paid for them) held in taxable brokerage firm accounts. That way, the IRS won’t be able to take more than 20% of your profits (or 23.8% if the dreaded 3.8% net investment income tax applies).

However, you may think that today’s somewhat frothy stock market valuations aren’t conducive to making such long-term commitments, even though short-term gains are heavily taxed. What to do? Here are some thoughts on how to rake in short-term gains without getting hosed with much higher taxes.

Sell unlovable losers to create capital losses

Usually I talk about “harvesting” capital losses, by selling loser stocks (worth less than you paid for them), in the context of year-end tax planning. But it works earlier in the year too, like now. Capital losses from selling unlovable losers can be used to shelter short-term gains collected anytime this year. If you have any leftover capital losses at year-end, you can carry them forward to 2018 and use them to shelter short-term gains collected next year and beyond. In other words, to the extent you have capital losses, there’s no need to hang onto winner shares for at least a year and a day in order to pay a lower tax rate.

Consider trading in broad-based stock index options

One popular way to place short-term bets on broad stock market movements is by trading in ETFs like QQQ (which tracks the NASDAQ-100 index) and SPY (which tracks the S&P 500 index). Unfortunately when you sell ETFs for short-term gains, you must pay your regular federal tax rate, which can be as high as 39.6% (or 43.4% if the 3.8% net investment income tax applies). Ditto for short-term gains…

Leave a Reply