Nov 15, 2018 Capital Gains-FAQs

Capital Gains – FAQs

What is a capital gain?

A capital gain is the profit when you sell a capital asset, such as stocks, bonds, mutual funds or property. The profit is your gain over the original price you paid and you must pay tax on that gain. For example, if a stock is bought at $50 and later sold at $100, the capital gain is $50.

What rate would apply to my capital gain distribution?

Long-term capital gains apply when you hold an asset for more than 1 year. You pay a different rate based on your Marginal Tax Bracket. Long Term Gains will be taxed at 0% if you are approximately in the 10% and 12% tax brackets, they are taxed at a rate of 15% if you are approximately in the 22%, 24% and 32% tax brackets, and taxed at 20% if you are approximately in the 35% and 37% tax brackets. For example, an investor that has a long-term capital gain of $1,000, and is in the 32% tax bracket, must pay 15% tax on the $1,000 capital gain which is $150.

Short-term capital gains apply when an asset is held for less than 1 year and are taxable at your ordinary income rate. For example, an investor that has a short-term capital gain of $1,000, and is in the 32% tax bracket, must pay 32% tax on the $1,000 capital gain which is $320.

Why do mutual funds pay capital gains?

When a mutual fund sells a security within the fund, the sale also creates a capital gain. Mutual funds are required by law to distribute virtually all gains to shareholders. This prevents the gains from being taxed at the Trusts Tax bracket (40%). For example, if you own mutual fund ABCDE and mutual fund ABCDE bought stock XYZ at $20 and later sold it at $100, mutual fund ABCDE is required to distribute the $80 in capital gain to you, the shareholder. You are then responsible for paying tax on the $80 capital gain.

How can I have capital gain distributions when my mutual fund is down during the year?

The capital gain distribution reflects the gains recognized by the trading activity of the fund manager during the year, which in turn is based on when and at what price the manager originally purchased the stock. So even though the mutual fund’s portfolio may be down for the year, the sale of the securities by the fund’s manager can still result in capital gains, particularly if they have been held in the portfolio for a long time. For example, mutual fund ABCDE owns only one stock, XYZ. It bought stock XYZ five years ago at $20. Stock XYZ began this year at $150 and finished the year down 33% to $100. The portfolio manager decides to sell XYZ at $100 realizing an $80 long-term gain (based on $20 initial purchase price) and also takes a negative return on the year. In other words, ABCDE had a 33% loss for the year and distributed $80 in capital gains to the shareholder. Now if you bought the fund just that year for $150, your basis increases by the $80 distribution. If you sold the shares for $100, you would be able to take a tax loss of the $50 difference in price plus the $80 distribution for a total loss of $130.

Can I offset my capital gain distributions?

Yes. Losses on your investments are first used to offset capital gains of the same type. So, short-term losses are first deducted against short-term gains and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against each other. So, if you have $5,000 of short-term loss and only $2,000 of short-term gain, the extra $3,000 of loss can be deducted against long-term gain. If short- and long-term losses exceed all of your capital gains for the year, up to $3,000 of the excess loss can be deducted against other kinds of income.

 

The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Company News

What was the Highlight of your Summer?

Welcome, Shawn!

Congratulations, Dirk!

Community Involvement: West Valley Dollars for Scholars

New Client Portal Experience

Market Commentary

2022 3rd Quarter Investment Commentary

2022 2nd Quarter Investment Commentary

Market Update: May 2022

2022 1st Quarter Investment Commentary

Market Update: February 25, 2022

Retirement Planning

Medicare Open Enrollment for 2023 Begins October 15th

Social Security Benefit Increase of 8.7% for 2023

The Huge Cost of Doing Nothing

Student Loan Update

Unclaimed Property and Retirement Benefits

Tax Planning

2022 Year-End Tax Planning

Important Ages for Retirement Accounts

Do I Need to Start Making Federal Estimated Income Tax Payments?

Reminders as you Prepare your 2021 Taxes

Washington State Long Term Care Tax on Pause

Cyber Security

Cybersecurity 101 – 2022 Update

Cybersecurity 101

New Changes to Web-Portal Password Requirements

Equifax Data Breach Update: Make a claim today

Cybersecurity 101

Important Disclosures

Leonard Rickey Investment Advisors, PLLC (“LRIA”), is an SEC registered investment adviser located in the State of Washington. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of LRIA, please contact LRIA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).

This is provided for general information only and contains information that is not suitable for everyone. As such, nothing herein should be construed as the provision of specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. There is no guarantee that the views and opinions expressed herein will come to pass. This newsletter contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information prepared by any unaffiliated third party incorporated herein and take no responsibility therefore.

Any projections, forecasts and estimates, including without limitation any statement using “expect” or “believe” or any variation of either term or a similar term, contained here are forward-looking statements and are based upon certain current assumptions, beliefs and expectations that LRIA considers reasonable or that the applicable third parties have identified as such. Forward-looking statements are necessarily speculative in nature, and it can be expected that some or all of the assumptions or beliefs underlying the forward-looking statements will not materialize or will vary significantly from actual results or outcomes. Some important factors that could cause actual results or outcomes to differ materially from those in any forward-looking statements include, among others, changes in interest rates and general economic conditions in the U.S. and globally, changes in the liquidity available in the market, change and volatility in the value of the U.S. dollar, market volatility and distressed credit markets, and other market, financial or legal uncertainties. Consequently, the inclusion of forward-looking statements herein should not be regarded as a representation by LRIA or any other person or entity of the outcomes or results that will be achieved by following any recommendations contained herein. While the forward-looking statements here reflect estimates, expectations and beliefs, they are not guarantees of future performance or outcomes. LRIA has no obligation to update or otherwise revise any forward-looking statements, including any revisions to reflect changes in economic conditions or other circumstances arising after the date hereof or to reflect the occurrence of events (whether anticipated or unanticipated), even if the underlying assumptions do not come to fruition. Opinions expressed herein are subject to change without notice and do not necessarily take into account the particular investment objectives, financial situations, or particular needs of all investors.

For additional information about LRIA, including fees and services, please contact us for our Form ADV disclosure brochure using our contact information herein. Please read the disclosure brochure carefully before you invest or send money.