What are capital gains? Basically, they are acquired when shares of a stock are sold for more than you paid for them. Taxes on these gains are then determined by how long the shares were held, and the profits you make from selling these stocks can also play a factor in your capital gains tax.
There are two types of capital gains tax and these are:
Short-term capital gains tax
If you hold an account’s investment for less than a year these will be taxed at short term capital gains rates, typically the same as normal income tax rates.
Long-term capital gains tax
If you hold an asset for more than a year this can bring significant tax benefits as you qualify for long-term capital gains rates which are often much lower depending on your annual income. These rates can vary from 0% up to 20%.
How to minimise or avoid capital gains taxes on stocks
See how to avoid capital gains tax on stocks here…
Make sure your assets are in the right accounts – this is known as asset location putting them into the most tax-efficient accounts for a particular investment. Any tax-advantaged accounts and retirement accounts can be used as a shield from capital gains taxes, but there may be contribution limits.
Investments with high returns can be held in tax-exempt accounts and those with short-term capital gains are generally best in tax-deferred accounts. Your most tax-efficient investments work well in a taxable brokerage account, these include stock funds and stocks that you don’t plan to trade often.
Using tax-loss harvesting involves intentionally selling stocks at a loss and these losses can be used to offset the impact of capital gains from the sale of other stocks. Bear in mind that the wash sale rule means that you can’t purchase identical shares 30 days before or after selling the stock for a loss as this would eliminate being able to use the tax loss against capital gains for that year.
You could consider donating stocks to charity as you would then not be liable for taxes on any capital gains as the share values increase. The market value of the shares can be used as a tax deduction on the day of the donation as long as your total itemised deduction exceeds the amount of the standard deduction.
Holding onto your stocks until you die will mean you never have to pay any capital gains tax during your lifetime.
Tax on share dividends
Capital gains tax on shares that are distributed by the company to shareholders isn’t payable on the first £2,000 you receive. Above this dividend-free tax allowance, you’ll pay tax based on the rate you pay your other income – your tax band. How to avoid capital gains tax on shares can be achieved if you hold your shares in stocks and shares Isas.
Need a tax accountant in London?
If you need any financial help then contact a trusted accountancy company that can provide you with the bookkeeping services in London that suits your business perfectly. An experienced tax expert will determine and calculate the capital gains tax you have to pay, offering you the best advice on avoiding capital gains tax on stocks.
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