Capital Gains Tax Changes - Frequency Of Shares Trading

The capital gains tax is a tax is an income tax on all capital gains made by individuals and corporations. This includes anything the investors may have earned while trading shares. Investors can lower their capital rates by trading their shares as infrequently as possible. According to the most recent tax laws, investors in the lower income tax brackets don't have to pay any taxes at all so long as they can keep the shares trading to the minimum.

How Capital Gains Taxes Work

Capital gains are profits made when investors sell capital assets - stocks, bonds, mutual funds, precious metals and property - and earn more than what they originally paid for it. Capital gains can be divided into two groups - short term and long term capital gains. When it comes to trading shares, short-term gains are gains made when the investors sell their shares less then a year after they bought them. The more they trade, the more capital gains taxes they would have to pay.

Long-term capital gains, on the other hand, are gains made from the shares that the investors keep for longer then a year. While investors have to pay capital gains taxes on short-term gains on annual bases, they don't have to pay taxes on long-term gains until the year they sell their shares. This gives their shares more time to gain value, which makes for bigger gains. In essence, the current tax law discourages trading, giving investors an incentive to hold off trading shares for as long as possible. On the short term, this limits an investor’s ability to make money. However, they can save substantial money on the long term basis.

How Long Term Capital Gains Taxes Benefit Investors

Aside from deferring tax payments, there are several ways in which the current tax laws encourage investors to trade as infrequently as possible. If the investor is in a 25% income tax bracket or higher, the maximum capital gains tax rate is limited to 15 percent of the gains' value. Short-term capital gains taxes, on the other hand, increase in proportion to the shares' value. This allows long-term investors to keep more of their gains on the long run.

In 2008, US Congress implemented a new zero percent tax rate on long-term capital gains for investors that belong in 10% and 15% income tax brackets. The former encompasses investors who earn up to $8,025 in annual income, while the later encompasses investors who earn between $8,026-$32,550 in annual income. So long as they sell their shares no less then a year after they purchased them, these investors don't have to pay any capital gains taxes.

Unfortunately for the lower-income investors, the above rule is temporary. Unless it is renewed, it will expire at the end of 2010. If that happens, they would have to pay the same percentage in capital gains taxes as investors in higher income brackets.


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