Capital gains taxes are one of the biggest burdens on Americans. If you’ve ever had to pay them, then you know how stressful it can be. Luckily, there are ways for you to get rid of capital gains taxes! In this blog post, we’ll discuss 3 different strategies that will help you avoid capital gains tax and save money in the long run.
1) Using a “Tax Loss Harvesting” Strategy:
This essentially means that you sell a stock or investment for less than its original purchase price. If you do this, then it can offset any capital gains taxes you might have to pay on your other investments.
The thing about “Tax Loss Harvesting” is that there are rules surrounding what kinds of sales trigger the loss and how much time has to pass before you can use it. For example, if you sell an investment for $100 less than what you bought it at and then buy that same stock one year later, then the IRS won’t consider this a valid loss.
Also important to note is that only your “tax basis” will be used to determine whether or not there’s a gain or loss. The tax basis is essentially what you paid for it minus any expenses, such as commissions and fees associated with the purchase.
Another thing to note about “Tax Loss Harvesting” is that there are limits on how much loss you can claim each year depending upon your income level and filing status.
If all of this sounds like gibberish to you, then I’d recommend consulting with a tax professional who can set up the appropriate documentation and give you the best advice in terms of when it’s most feasible for you to sell certain investments.
2) Invest in the Right Assets (Real Estate and Gold) and Avoid Bad Ones (Stocks).
If you want to avoid paying capital gains taxes, then it might be worth looking into investing in real estate and gold. Bitcoin is a hot investment these days and if you want to get in on the action, then look no further than Bitcoin Motion.
Real estate is an excellent investment because the long-term trend has always been for property values to steadily increase over time. Also important to note is that rental income can offset any losses or depreciation resulting from a downturn in the market.
Another reason why real estate is a great choice for an investment is because you can deduct the interest paid on your mortgage from any income or capital gains taxes that you may have to pay in a given year, which would give even more of a tax advantage over other types of investments. There are also many real estate investment options such as a 1031 exchange which offers a tax deferrence. The benefits of a 1031 tax-deferred exchange means that not only are you postponing capital gains tax, but it allows you to defer this tax by reinvesting it into another property, this allows you to grow your investments faster and helps manage cash flow.
As far as gold goes, this isn’t necessarily a tax advantage, but you can invest in it and cash out after a few years without worrying about any type of penalties.
On the other hand, investing in stocks is never advisable because there’s always going to be some level of risk involved. With that being said, if you do buy stock and then sell it for more than what you bought it for, then you’re going to have to pay capital gains taxes.
The same thing goes for investing in other types of securities like cryptocurrency and bonds.
Finally, if possible, try your best not to sell investments until they become profitable so that you can avoid having any sort of tax liability at all. That means holding onto money-losing investments for as long as possible and then cashing out when the time is right.
3) Use IRA or 401(k) to Maximize Your Return.
Retirement accounts like an IRA and 401(k) can be a great way to diversify your assets while also saving for the future.
IRA stands for “individual retirement account,” which means it’s basically just another type of savings or investment, similar to a traditional brokerage account. With that being said, IRAs are better than other types of financial accounts because there are limitations on how much you can contribute each year, allowing your savings to grow faster.
Another reason why an IRA is a great investment vehicle is that you get tax advantages when it comes to withdrawals and contributions. The amount that you’re allowed to save in one will be subtracted from the total income reported for any given year, which will lower your taxable income and save you money in the process.
401(k)s are similar to IRAs but they’re offered through an employer instead of directly by a financial institution or brokerage firm. 401(k) is essentially just another way for companies to incentivize employees to invest their hard-earned dollars so that they can enjoy a more financially stable future.
With that being said, the government has put laws in place to make sure you don’t abuse or take advantage of this type of vehicle by putting too much money into it; otherwise known as “tax deferral.” If your combined contributions exceed $18,000 per year (or $24,000 if you’re 50 or older), then the excess amount will be taxed at your income tax rate.
If you have a 401(k) through work, it’s best to max out contributions in order to get the maximum benefit from taxes when they are withdrawn years down the road since that can save you thousands of dollars on capital gains taxes.
Final Notes:
When it comes to investing, there are many different ways to go about it.
It is worth noting that if you are a business owner and employed staff during COVID-19 then you may be eligible for an ERC, this is a payment that supports businesses that kept going through the pandemic. ERC is not taxable income and can be spent however you desire.
The best type of investment is one that can help you grow your money while also keeping capital gains taxes low or nonexistent. Capital gains tax rates vary depending on the length of time an investment was held and how much profit it generated for investors, so always consult with a financial professional before making any financial decisions.