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If you held the stocks for less than one year, the capital gain is considered short term, and you will pay ordinary income tax rates. If you have a short-term capital loss, you may subtract the loss from the gain, and the balance will be taxed as ordinary income.
Long-Term Capital Gain If your entries on Schedule D determine that you held the stock for longer than one year, the capital gains qualify for the lower capital gains rate which, for the tax year, is a maximum of 20 percent. If you had a long-term capital loss, you may subtract the loss from the gain, paying 15 percent on the balance. Dividend Reinvestment Plans Selling stock that was purchased through a dividend reinvestment plan can be a little more complicated.
You may have made your original purchase more than a year ago, but because you are reinvesting, for example, quarterly dividends, you may have some shares purchased within the past 12 months when you decide to sell. Keep good records so you can document what part of your gain is short-term and how much is long-term.
Blog Should I reinvest capital gains? Capital gain distributions are paid to investors by mutual funds, typically at years end, when during the year the fund has sold holdings which have gone up in price since they were purchased by the fund. Essentially, the profits from transactions made by the funds are distributed to investors that own the mutual fund.
Advantages of Reinvesting Capital Gains One of the significant advantages of re-investing your capital gains is that the amount available for investment amount increases and so does the return on it as the reinvested gains forms the engine of a growing portfolio.
All that needs to be done is simply instruct your investment manager to automatically re-invest all the capital gain proceeds into your account. Once done, your earnings coupled with initial investment amount work to earn even higher amounts of dividends and capital gains. In terms of tax collected by the Internal Revenue Service IRS on both dividend income and capital gains, you can exercise the liberty of delaying tax payments if you re-invest the gain back into your investment account.
Though you will have to pay the tax on capital gains ultimately when you withdraw the cash from your account, re-investing the amount can help you better plan your tax obligations and payments.