Lets first start off with discussing what a capital gains tax is. Capital gains taxes refer to taxes that one must pay on investments gains held and realized in a given year. After all, it is income, so the government wants to take a piece of it (fair but not a great feeling when you see your taxes). However, the benefits definitely outweigh the negatives of capital gains related investments, and although the government is not 100% forgiving when it comes to taking part of your investment income, I see the opportunity to pick up passive income as a net gain for you.
No. You are Not Taxed Twice On Capital Gains..You Are Taxed Like This…
Capital Gains tax is entirely dependent on two factors:
1) How long your investment is held
2) What level of income you have
Lets start with #1 – According to the IRS “Capital gains and losses are classified as long-term or short-term. If you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. To determine how long you held the asset, count from the day after the day you acquired the asset up to and including the day you disposed of the asset.”
The way I like to think about this is simple – the government incentivizes investors to hold onto their gains long-term. In that respect if an investment is held for longer than a period of one year, the U.S. government only takes 15%. However, if an investment is held for less than a year the gains are taxed at 33%. This has helped create more stable markets, as investors realized they are smarter to make long-term investment decision, rather than quick trades.
Why Does This Matter?
This is a rhetorical question because it should matter to everyone! If you are not taxed twice on your investment, and it makes sense to hold long-term, then do that!
After all Investing long term is the best way to build real wealth anyway.