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Capital Gains and Your Investment Portfolio

September 01, 2018
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As we approach the last quarter of the year, tax-smart investors typically review their portfolios to determine which investments to hold and which ones to sell. When you conduct this exercise, you should understand a few basics about capital gains taxes.

Realize the Difference

You receive realized gains when selling a security for a profit. Unrealized gains are an increase in the value of securities you continue to hold — they are paper gains only. An example of the latter might be investments you maintain in a retirement plan’s mutual funds.*

Next, know the difference between short-term and long-term capital gains. Securities you sell after owning them for one year or less will produce short-term capital gains, and you’ll pay taxes on those gains at your ordinary income tax rate. The highest bracket in 2018 tops out at 37%.

Favorable Tax Rate

Capital gains realized from investments held longer than a year and a day are taxed at the more favorable capital gains tax rate. This rate tops out at 20% for taxpayers filing jointly with an adjusted gross income over $479,000 and $425,800 for single taxpayers. In 2018, those in the 20% capital gains bracket will also pay an additional 3.8% tax related to the Affordable Care Act.

For the majority of investors, whose annual income is lower, the capital gains rate is 15% for joint filers earning between $77,200 and $479,000 and single filers earning between $38,600 and $425,800. Taxpayers with adjusted gross incomes below these thresholds pay 0% on long-term capital gains.

Personal Decision

Whether you sell or hold your investments depends on your personal circumstances. Some investors may want to employ what’s known as tax-loss harvesting, which allows you to subtract investment losses of up to $3,000 from your taxable income. Consult a tax professional to make an appropriate decision for yourself.

* You should consider the fund’s investment objectives, charges, expenses and risks carefully before you invest. The fund’s prospectus, which can be obtained from your financial representative, contains this and other information about the fund. Read the prospectus carefully before you invest or send money. Shares, when redeemed, may be worth more or less than their original cost.