Capital gains tax is an important aspect of investing and can significantly impact your investment returns. Understanding how it works and exploring strategies to minimize your tax bill is crucial. In this article, we will delve into the concept of capital gains tax, its calculation methods, and effective ways to cut your tax bill.
Long-term capital gains tax and short-term capital gains tax are the two main types of capital gains tax. Long-term capital gains tax is applied to investments held for more than one year, while short-term capital gains tax applies to investments held for less than a year. The tax rates for long-term capital gains are typically lower than those for short-term gains.
Capital gains tax triggers occur when you sell an investment at a profit. It is important to understand when and how capital gains tax is triggered to effective plan your investment strategy. If you're sitting on profitable investments, you may consider tax-gain harvesting as a strategy to rebalance your portfolio or save on future taxes.