Most people opt to make investments with the long-term goal of growing their money. The investment grows in value, making your initial investment worth more.
At some point though, you might want access to your money and will sell or cash in your investment. Aside from the bonus of accessing your money is the taxes you have to pay on the money you make.
Whether those gains were created from short-term gains or when they were long-term capital gains, the money you make gets hit with a tax.
These capital assets get taxed based on several factors. Read on to learn about the differences between short-term capital gains and long-term gains.
Understanding Capital Gain
Let’s start with a common understanding of the term capital gain. A capital gain refers to the gains in value an asset makes over time. In most cases, even if you’re aware the asset has increased in value an investor doesn’t have access to the gain until the actual asset is sold.
While you can have capital gains, you can also experience capital losses too. This means the investment went down in value over time and when you cash it out, you will have lost money from the initial investment.
When you do have a capital gain, that increases in value, you typically will pay taxes on the amount of gain you get. Learn more about investing and paying taxes at https://silvertaxgroup.com/robinhood-taxes/.
Short Term Capital Gains
Short-term capital gains happen when you cash out an investment, you make a gain in a year or less from when you made the initial investment. Because you have had the asset for what’s considered a short period of time, you are taxed like it is part of your regular income.
Any time you have a capital gain, you get taxed on the difference. One key difference from short-term gains is that you pay a tax at the same rate as your taxable income.
When you have a job, the federal government considers how much money you make. Then you are placed in a tax bracket and taxed according to the tax rate for that income.
A short-term capital gain typically pays a higher tax rate than a long-term capital gain. The higher rate is because you had to spend less time making the money.
Long-Term Capital Gains
Like short-term capital gains, long-term capital gains mean you make money when the asset is sold. However, in a long-term capital gain, it takes longer. You have the investment for longer and it takes longer for it to grow.
Because the asset took longer for there to be growth, you typically pay a smaller tax rate for a long-term capital gain.
Comparing Short Term Vs Long-Term Capital Gains
It comes down to two key differences. One is time. The short-term capital gain comes about in less than a year. The other key difference is the rate at which those gains get taxed when they’re cashed out.
Understanding Capital Gains and Your Income Tax Liability
Short-term and long-term capital gains are not that different. Although if it’s possible, it makes sense to leave the asset alone so you can pay the lower rate of taxes on the amount.
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