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Capital Gains Tax Guide for Investors

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Short-Term Capital Gains Tax Rates
Short Term Capital Gains Tax Rates

Short-term capital gains tax rates are based upon your personal income tax rates. Put simply, if you own a stock for less than one year, you are going to be taxed on any gain at the same rate you pay income taxes. A 35% bracket person would pay 35%.

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The short-term capital gains tax rate is based upon your personal income tax rate (currently capped at 35%) and applies to stocks, bonds, mutual funds, real estate investment trusts, or other investments that have been held for less than one year. For instance, someone in the 35% tax bracket who made a $50,000 short-term capital gain would pay taxes of $17,500 ($50,000 x 35% = $17,500 short-term capital gains tax liability).

The Connection Between Short-Term Capital Gains Tax Rates and Portfolio Turnover

Short-term capital gains taxes can take a huge bite out of your investment returns and is one of the reasons investors who use a value investing philosophy focus on lowering turnover in their portfolios. Famous money management firms such as Tweedy, Browne have released research reports showing that it's possible to generate higher wealth over long periods of time by keeping short-term capital gains low than it is getting a slightly higher return and being stuck with full taxation on your profits.

Of course, short-term capital gains taxes aren't applied to investments held in tax-advantaged accounts such as a Roth IRA or 401(k). That's one of the features that makes these types of account so attractive to investors who want to learn how to invest in stock or buy their first mutual fund.

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