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  • Alex Jaacovi

Capital gains and waiting

Long-term capital gains occur when an individual holds an investment asset for more than one year and then sells it for a profit. This type of investment can be an excellent way to build wealth, and there are several tax benefits to long-term gains that can help investors keep more of their profits. In this article, we will explore the tax benefits of long-term gains and how investors can take advantage of them.


The primary tax benefit of long-term capital gains is the lower tax rate. Short-term gains, which occur when an individual holds an investment asset for less than a year and then sells it for a profit, are taxed at the same rate as ordinary income. This can be as high as 37%, depending on the individual's tax bracket. However, long-term gains are taxed at a lower rate, with the maximum tax rate currently set at 20%.


The tax savings from long-term capital gains can be significant. For example, an individual in the highest tax bracket who realizes a $100,000 short-term gain would owe $37,000 in federal income tax. However, if that same individual held the asset for more than a year and realized a $100,000 long-term gain, they would owe only $20,000 in federal income tax. That's a tax savings of $17,000, or 45.9%.


Another tax benefit of long-term capital gains is the ability to offset gains with losses. If an investor sells an asset for a loss, they can use that loss to offset gains realized on other investments. This can reduce the amount of taxes owed on the gains and can help to minimize the overall tax burden. This strategy is known as tax-loss harvesting and can be an effective way to manage a portfolio's tax liabilities.


There are also several ways that investors can defer taxes on long-term capital gains. One popular strategy is to use a 1031 exchange, also known as a like-kind exchange. This strategy allows investors to sell an investment property and use the proceeds to purchase a similar property without paying taxes on the gains realized from the sale. This can be an effective way to defer taxes on long-term gains and can help investors to build wealth over time.


Another strategy to defer taxes on long-term gains is to use a charitable remainder trust (CRT). A CRT is a type of irrevocable trust that allows the investor to donate assets to a charity while still retaining an income stream from the assets. The investor can donate appreciated assets, such as stocks or real estate, to the trust, and the trust can sell the assets without incurring taxes on the gains. The investor can then receive an income stream from the trust for a set period, after which the remaining assets are donated to the chosen charity.

In conclusion, long-term capital gains can be an excellent way for investors to build wealth, and there are several tax benefits to this type of investment. The lower tax rate, the ability to offset gains with losses, and the ability to defer taxes through strategies such as 1031 exchanges and charitable remainder trusts can help investors keep more of their profits and minimize their tax burden.


It's essential to understand the tax implications of investment decisions and to consult with a financial advisor or tax professional to ensure that you are taking advantage of all available tax benefits while staying compliant with all applicable tax laws and regulations. By doing so, investors can build a portfolio that is optimized for growth while minimizing their tax liabilities.


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