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Thread: Why and how the IRS thinks long is better.

  1. #1
    BoxLiz Guest

    Default Why and how the IRS thinks long is better.

    A capital gain occurs when you sell an asset for a profit. That asset could be a house, land, machinery, stock, or a bond. When that happens, the capital gains tax comes into play. Since we are discussing stocks, I’ll stick with how the tax applies to investing. You figure the capital gains tax on the difference between your “basis” in the stock and the sales price. This difference is your profit or loss. The basis is usually what you paid for the stock, however if you inherit the stock, the basis is the price of the stock on the day the owner died.
    If the difference between the basis and the sales price is negative, in other words, you lost money; you have a capital loss, which you can use to offset capital gains.
    There are two types of capital gains:

    • Long-term Capital Gains
    • Short-term Capital Gains

    Understanding the difference is very important.

  2. #2
    Brianalbuh Guest


    You must hold the stock at least one full year to qualify for the long-term capital gains rates. This is extremely important and I encourage you to make absolutely sure by holding the stock one-year and a day at least. The tax on a long-term capital gain is currently 15% if you are in the 25% income tax bracket or higher and just 5% if you are in the 15% or lower tax bracket.
    As you will see, qualifying for the long-term rates is important.

    Short-term Capital Gains

    If you hold a stock less than one year before selling it, the IRS classifies the sale as a short-term capital gain and taxes the profit as ordinary income. This means you could pay 25% or much higher of your profit in taxes. Unless there is a compelling reason, hold on to the stock long enough to qualify for the long-term capital gains rates.

  3. Default

    It is important to know, but I don't think it's a great idea to hold onto a stock that you don't want to just so you can qualify it as long-term. Any gains can be lost in that time that you hold it and the stock's story changes. While the government is taking more money for short-term gains, a gain is still a gain. Well, that's how I at least look at it.

  4. #4
    Caleblm Guest


    When the folks at the IRS wrote that law they were apparently only thinking of folks not interested in losing
    money as the tax law in terms of time applies only to capital gains, apparently if you're losing money then you
    are welcome to rid yourself of that burden anytime without further inconvenience nor penalty from the IRS.

    Insofar as gains are concerned, did you foresee today's rally?
    Yesterday, did you know we would be almost 100% in the green today?
    And you managed to take appropriate action so as to cash in on it?

    If the answer is no, I would likely recommend hanging on to your stocks.
    That is, unless all they're doing is losing money.

    The IRS will even pay you to do so!

  5. Default

    Trader Joe has purchased stock XYZ today for $4.00 a share and by tomorrow
    finds out that his stock has soared to $6.00, a gain of ~50%.

    Lets assume stock XYZ only gains another 5% the entire rest of the year to end up at a bare 55% for the year despite that amazing overnight rally, would you believe that Joe would be as well, if not better off hanging on to his stock for a year?
    Because Joe will pay a whopping 25 percent or higher tax if he sells!

    That's why Joe will lose out on that gain if he decides to lock in his profits by selling,
    whereas if he holds on to it, the IRS will PAY Joe in ways of lowering his taxes.
    Joe will only pay 5 to 15 percent or so tax if he holds on to it.
    He pays half, literally HALF the tax by not selling.

    Read: Joe gets paid cash money for doing absolutely nothing!

    In graphical terms, lets assume Joe invested exactly a thousand dollars into XYZ.
    Sell it the next day, Joe gets to pay at least $125 for that luxury.
    So that out of that 50% gain he had $1,500 minus tax = $1,375 (assumed 25% tax)

    Hold on to it for a year, Joe not only gets to pay less, but he gains more...
    So that out of a 55% gain he has $1,550 minus tax = $1,480 (assumed 12.5% tax)
    The IRS literally just paid Joe $100+ for being cool.

    Sicker still, if Joe's stock XYZ stays at $6 and trades absolutely flat the whole rest of the year,
    he still comes out $1,437.50 instead of $1,375... Joe gains $62 even if his stock doesn't, which
    is like a free 4% interest for doing nothing.

    Last but not least, Joe's stock XYZ could actually lose some money the entire
    rest of the year and yet Joe would end up breaking even.

    Would Joe be smart to hold on to it, or is Joe the kind of guy who likes to work hard for a buck?
    My stake on it is that unless Joe has compelling reason to believe that stock XYZ is going to fall
    and drop below its acquisition price and then not rise past it again...
    Unless Joe is pretty darned certain of himself or his stock, he better not sell.

    Puts a whole new twist on all that day trading, don't it?

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