Taxing stock investments is pretty straightforward. The profits from stock investments, and most other investments, are called capital gains. The profits from selling stocks are taxed at the rate of 15%. If you are in the 10-15% tax bracket, you are taxed at 5%. One important exception to this rule is precious metals Exchange Traded Funds (ETFs). Many people are buying precious metals in the form of coins, bars, or certificates. All of these and every other form of collectible is taxed at a higher rate, including ETFs.
Collectibles
Precious metals, even in the form of ETFs, are considered to be collectibles. Collectibles are taxed at a special rate of 28%. If you should sell your ETF in less than one year (short term gains), you will be taxed according to your regular tax bracket. This suggests that these ETFs should be held for at least a year unless you fall below a 28% tax bracket.
Other Stocks
Since there isn’t much flexibility in the taxing of capital gains, any strategy for minimizing losses must work around the fixed tax laws in place. Any investing strategy involves attempting to maximize profits. When you are able to maximize your profits, you make more money. If you are above a 15% tax bracket, then the taxes on your capital gains is less than your regular income taxes. Never mind that you have already paid income tax on this money, so it is a double tax.
Although it is a bit ironic, one way to minimize taxation on capital gains is to lose money on some of your stocks. I have been guilty of holding on to certain stocks for dear life even though I know they are not likely to ever bring me a profit. I finally wised up and realized that there were distinct advantages to selling some of my losing stocks at a loss.
The main reason I started culling my losing stocks and selling them was to free up some cash for investing in potentially better stocks. So I sold a number of these stocks. It turns out that this has a double benefit. I have money to re-invest in something better and I will get a deduction from my taxes because of the losses.
I’m not suggesting that you have a strategy of losing money in order to lower your taxes. I’m suggesting that you move more swiftly when you have a losing stock that probably won’t go back up in your lifetime. Bite the bullet and get rid of it at a loss. Free up some money and lower your tax burden.
Other than that, be careful about short term gains. Unless you are confident that you will make a killing by selling a stock in less than a year, hold out for one year and one day and then sell.