Will I Have To Pay Tax On The Sale Of My Investment?
Will I Have To Pay Tax On The Sale Of My Investment?
When an individual sells an investment, the tax impact depends on a variety of factors such as the type of investment, how long they held it, and the price at which they sold it.
The first factor to consider is whether the sale resulted in a capital gain or loss. If the proceeds from the sale are greater than the individual's basis (i.e., the amount they originally paid for the investment), they have a capital gain. If the proceeds are less than their basis, they have a capital loss.
The second factor is whether the investment was held for the long-term or short-term. If the investment was held for more than one year, it is considered a long-term investment. If held for less than one year, it is a short-term investment. Long-term capital gains are generally taxed at a lower rate than short-term capital gains, which are taxed at the individual's ordinary income tax rate.
The third factor is the individual's tax bracket and applicable rates. The higher their income, the higher their tax rate on capital gains will be. For example, if a individual's income puts them in the 24% tax bracket, they will pay a 15% tax rate on long-term capital gains, but if their income puts them in the 35% tax bracket, they will pay a 20% tax rate on long-term capital gains.
Finally, the Medicare Surtax calculation is important to consider for higher-income individuals. If a individual's income exceeds $200,000 ($250,000 for married filing jointly), they may be subject to an additional 3.8% Medicare Surtax on their net investment income, including capital gains. This surtax applies to the lesser of their net investment income or the amount their income exceeds the applicable threshold.
The "Will I Have to Pay Tax on The Sale of My Investment?" flowchart helps individuals navigate these factors and understand the potential tax impact of selling their investments. By considering these factors in advance, individuals can make informed decisions about when to sell their investments and how to optimize their tax liability.
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Robert J. Pyle, CFP®, CFA, AEP® founded Diversified Asset Management, Inc., in 1996 to provide personalized, comprehensive wealth management services to successful individuals, families, single women, and business owners. His specialty is addressing the complex financial needs of self-employed professionals, corporate executives, and small-business owners. Our disclosure can be found here. The views, opinion, information, and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting, or tax advice.