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As Buck investors investing for the long term, we can expect to make money in the stock market with the help of research, patience, and time. There may be times when we lose a little money here and there, but in the long run, we expect to become wealthy.
Two Types of Gains-Unrealized and Realized
Yes, there are two different kinds of gains involved in investing. These are realized and unrealized gains. If you invest in the stock market or in a mutual fund, you will encounter both of these types of gains.
Unrealized gains are increases in the price of a stock or mutual fund (NAV) that occur while you are holding the stock. If you invested $1000 in XYZ stock and a month later your investment was worth $1050, then you would have $50 in unrealized gains because you have not yet sold the stock.
When the stock or mutual fund is sold, you incur realized gains. A realized gain is the increase in the stock/mutual fund price that you receive when you sell it. For example, if you sold the XYZ stock after one month, you would have $50 in realized gains. When you sell an investment and have a realized gain, then the IRS comes in to make sure they get their share of it, which brings us to our next topic.
Taxes
As the current tax season comes to an end, I'm sure all of us are preparing for next year, right? Many of you may have sighed with relief that you made it through this year's taxes and next year's taxes may not even occupy a space in your mind. If you are new to investing this year, then you need to know that your capital gains will be taxed next year.
Most of the time, capital gains are an investor's best friend. However, during tax season, capital gains are seen as income so they can be taxed by the IRS. With capital gains on investments that you have owned for less than a year, expect to pay taxes on them at the current rate you pay for your regular income. For example, if you pay 28% in taxes then expect to pay 28% of your capital gains in taxes.
As Buck investors, most of us will invest for the long term and will probably hold a few stocks or mutual funds for over a year. If you hold an investment for at least 12 months, then the gain is referred to as a long term capital gain and qualifies for a lower tax rate. For people in the 28% tax bracket, long term capital gains are taxed at 20% and for people in the 15% tax bracket, taxes on these gains are taxed at 10%.
If you are uncomfortable with paying this much in taxes on your gains, then you can talk to a tax advisor about ways to limit your capital gains. There is also a tax law that allows you to offset capital losses and capital gains. This means that if you sell a stock or mutual fund that you have lost money in, then you can deduct some of it from your capital gains for that year. We recommend that you speak with a tax advisor about doing this.
Now that you have learned a little about capital gains, we hope that you have a chance to make gains on your investments. Although the IRS takes their share, capital gains help you achieve your financial goals, whatever they may be.
A majority of the wealth that is created through investing is in the form of capital gains. A capital gain is the amount of money that you make on an investment when it is sold. For example, if you bought $1000 of XYZ stock and later sold it for $1200, you would have a capital gain of $200. As an investor, hopefully you will become well acquainted with capital gains.
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