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The whole point of investing is to earn a profit on the investments. To do so successfully, it is critical to understand how your investment profits are taxed. It’s no secret that the Internal Revenue Service (IRS) takes a share of your profit, but did you know there are steps you can take to cutting the tax bill on your capital gains?

Short-term capital gains tax rates apply to investments you owned for a year or less, and your specific rate depends on your income tax bracket – just like on your regular federal taxes. The brackets apply to your entire taxable income. The Motley Fool uses joint filers’ bracket table as an example in this article:


Over But not over       of the amount over  
$0 $18,550 N/A + 10% $0
$18,550 $75,300 $1,855 + 15% $18,550
$75,300 $151,900 $10,367.50 + 25% $75,300
$151,900 $231,450 $29,517.50 + 28% $151,900
$231,450 $413,350 $51,791.50 + 33% $231,450
$413,350 $466,950 $111,818.50 + 35% $413,350
$466,950 $130,578.50 + 39.6% $466,950

The publication also offers a complete list of 2016 tax brackets so you can see exactly what you’ll be looking at when you do your taxes this year. Naturally, you won’t be able to determine your exact capital gains tax rate until you know your total income for 2016. For those who earned less than $18,550 last year, for example, will pay 10 percent in taxes on short-term capital gains. For those who made $466,950 or more, they will pay 39.6 percent, and so on.

Preserving More of Your Profit by Avoiding High Short-Term Capital Gains

There are a few things you can do to legally lower the rate you’ll need to pay.

  1. If you invest in a tax-deferred account, you can typically buy and sell stocks without immediate tax consequences from gains or losses on their sale.
  2. If you hold an investment for longer than one year before selling, you can qualify for lower long-term capital gains rates.
  3. If you have investments on which you have lost money, selling them to generate short-term capital losses can allow you to offset gains.
  4. If you are an attorney, you can defer your income through structured attorney fees.

Dealing with short-term capital gains is a good problem to have – it means you made a profitable investment. Still, it makes sense to cut your tax bill when you can by making smart financial decisions and taking the right steps to avoid high short-term capital gains rates.

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