Avoiding Capital Gains Tax

Value: $17,629 | Gain: +$188 | Return: ▲1% | Dividends: $3

👋 Hello Dividend Investors.

I hope you are doing wonderful. I mean, soon, you will be getting $600 or $2,000 depending on how things turn out in the next few days.

As you know, I have done a fair amount buying and selling this year. And that means I have accumulated some capital gains. Fortunately for me, I have some loss carryforwards from earlier years (thanks to Bitcoin) that will allow me to reduce my capital gains to zero and thus avoid a tax hit.

Let’s talk about Capital Gains.

Simple put, capital gain or loss is the difference between the amount you pay for a stock and the amount you receive when you sell it. If you receive more than what you paid for, it's a capital gain. If you receive less than what you paid for, it's a capital loss.

Formula: Purchase price - Sell Price = Capital Gain or Loss.

Before you sell the stock, the ‘paper gains’ are considered "unrealized." Once you sell the stock, the gains are realized and considered taxable income. The same logic applies to losses with one exception - taxes.

Losses can be offset against gains, but if you have more losses than gains, you can reduce your ordinary income by that same amount up to the limit of $3,000. Losses of more than $3,000 carryover to future years.

That's what's happening in my situation with carryover losses. I went all in on Bitcoin and other crypto currencies in 2017. I invested $10,000 and by the end of 2019 had lost $7,000 and decided to sell.

I know. I wish I had invested that $10,000 in dividend paying stocks in 2017. Lesson learned.

Long-term vs. Short-term

Capital gains and losses can either be short-term or long-term. If you buy and sell a stock within one year, the resulting gain is short-term. If you buy and sell a stock after one year, the resulting gain is long-term.

Short-term capital gains are taxed at ordinary income tax rates. And long-term capital gains are taxed at more favorable lower tax rates.

Here’s the tax table:

As you can see, the minimum amount of tax you pay on short-term gains is 10%. However, for long-term gains, there’s no tax unless you earn over $40,000 (Single) and $80,000 (MFJ).

The tax code favors long-term investors. Take the hint.

Note: I am discussing taxable accounts. If you buy and sell within a non-taxable account like a 401(k) or IRA, you don’t have to worry about capital gains or losses.

In summary, capital gains trigger taxes. To avoid taxes, you should invest in a non-taxable account or engage in tax-loss harvesting. To reduce the amount of taxes, you should hold on to stocks for more than a year.

Let’s do the numbers.

For the Week

Value: $17,629 | Gain: +$188 | Return: ▲1% | Dividends: $3 | Investment: 349.

For the week, I invested $349 in new cash. $249 went towards buying the 13 companies in my HBR Best CEOs list and $100 went towards Lockheed Martin.

Dividends Received
For the week, I received $3 in dividends from the following companies:

  • Coca-Cola (KO): $1.54

  • McDonald’s (MCD): $0.97

  • eBay: (EBAY): $0.68

Portfolio All-time (12/23/2020)

Value: $19,171 | Gain: +$2,009 | Return: ▲12% | Link to portfolio: M1 Finance | Website | Excel

Projected Dividend Income

Annual: $631| Monthly: $53

Until next week, ✌️


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Disclaimer: Dividend.Fun is an informational publication, and by reading it, you understand you are not receiving investment advice. Unless otherwise noted, all data is as of the date the newsletter was published.