No Tax on Stock Capital gains?

Question

Let me put my question with an example.

I buy citibank stock for say $48 today. At the end of the year, I have say $3 in capital gains and $2 of dividends (hypothetical numbers).

If I understand correctly, I will pay a tax at 15% on my $2 divident. But I will pay no tax on the capital gains. If I have not sold the stock.

To put it in simple words. If i buy and hold a stock for 10 years, I pay no tax on capital gains until I sell it? Is that true? If that is true, then this is a great option for tax deferred investment. Am I right?

I am already maxing out on my 401k and IRA. So, am looking for an alternate tax deferred investment for additional savings.

Please advice guys. Thanks a zillion

Answer 1

Retirement accounts: 401(K)'s, Traditional IRA's, Roth IRA's, and Simple IRA's do not tax capital gains within the account. You are only taxed if you don't obey the distribution rules (each is different). There is also a tax sheltered account for childreen to save for college/ other education, but it varies from state to state, so check with your broker/ accountant. Hence they're called "Tax Sheltered Accounts"

Individual, Joint Tennant with Rights of Survivorship (JTWROS), Unified gift/trust to minnors (UGMA),Trust, corportate account set up's get taxed when there is a "SALE" or "EXCHANGE OUT"; hence they're called "Taxable Accounts".

This produces a 1099 -B which shows the sale proceeds. It is up to you, the owner to give the IRS the "Cost Basis" (the price you bought at). However, If you are a "Day - Trader" then there are higher taxes (sales within 90 days after buying).

The 1099-DIV/ Int form reports all dividends and interest paid out from investments (again to all taxable accounts - Tax sheltered accounts do not get taxed on these). There is no sure way to avoid this when holding investments. You can ask your broker to find investments like "Aggressive Growth" stocks which re-invest instead of pay dividends ... however, a company may need to pay dividends eventhough they'd rather re-invest $.

Please don't set up your portfolio to only consider the "Tax Shelter" accounts (retirement and education savings). These are nice and build a wonderful nest egg; they should definanlty be a part of your savings ... however, you need to save in other investment vehicals too (Individual, JTWROS, Trust accouts) because life happens between here and 59 1/2 years old. Stuff in life like: Vacations, Weddings, Health Emergencies, Home up-grades, a corvett for your mid-life crisis, hot-tubs, etc- etc- etc. Sure you get that moderate tax from selling the stocks/ mutual funds (capital gains tax), but you don't have to worry about silly distribution rules.

Answer 2

bostonianinmo's advice is correct with one exception. He is giving you information abuot taxes on dividends prior to the Bush Tax Cut. Prior to the tax law change, dividends were taxed at your ordinary income tax rate (same as your paycheck). Short term capital gains were taxes at your ordinary tax rate when you sold the stock or good. Long term capital gains were taxed at 20%.

After the tax change, dividends and long term capital gains are taxed at 15%. The tax changes were temporary, but I believe that the bill will be extended.

The bottom line -- your analysis is correct.

Answer 3

You have no captial gain until you sell. However, that's not a tax-deferred investment in the sense that a 401k or IRA is.

Dividends are taxed at your marginal rate. If your marginal rate is 15% then that's what they'll be taxed at. If you marginal rate is 35%, they'll be taxed at that rate.

Answer 4

You do not pay taxes until you sell your stocks. If you keep them longer than a year, then you pay capital taxes. On the dividens you should pay taxes as ordinary income. I am not a tax adviser, but that is why I understand.

Answer 5

The loss might cancel out the earnings. No tax due. Capital advantageous factors is calculated based on the internet entire of your sales. You pay capital advantageous factors once you document your earnings tax, and the quantities are pulled out of your annual assertion.

Answer 6

yes, that is true. no taxes on the gains until you sell. however remember you can also lose it all.