Don't just take the money and run.
Any money you need for near-term goals or emergencies should be kept in a savings account. That way, you know your principal is protected.
But if you have money available that you don't have a near-term need for, it pays to invest it, whether in stocks, cryptocurrency, or another asset. The reason? Investing your money carries risk, but there's also the potential to generate strong returns.
If you invested in a brokerage account like Robinhood, you may have earned money in that account by virtue of your investments gaining value. And you may now be tempted to cash out your investments and use that money as you please, whether to go on vacation or meet another goal. But before you cash out your brokerage account, you'll need to understand the tax implications involved.
Your gains aren't all yours to keep
Whenever you sell an asset at a price that's more than what you paid for it, you're subject to capital gains taxes. The amount of those taxes will depend on how long you held the assets in question before selling them.
If you sell investments like stocks or cryptos before having held them for at least a year and a day, you'll be subject to short-term capital gains taxes on your profits. Short-term capital gains taxes are comparable to the taxes you pay on ordinary income, and they can eat into your profits substantially.
By contrast, if you hold your investments for at least a year and a day before selling them, you'll be bumped into the more favorable long-term capital gains tax category. That will result in less of a tax bill.
That's why if you're sitting on gains in your brokerage account, you shouldn't rush to cash them out. Rather, you should understand how they might impact your taxes.
As an example, say you're looking at $5,000 in short-term gains in your brokerage account and you're a single tax-filer earning $80,000 a year. In that case, your tax rate for your capital gains will be 22%, and your tax bill will be $1,100.
Now, let's say you're looking at $5,000 in long-term capital gains. In that case, your tax rate will be 15%, and your IRS bill will come to $750.
If you're a higher earner, it's especially important to try to hold onto investments for at least a year and a day before selling them. Long-term capital gains max out at 20% for higher earners. But short-term capital gain tax rates for higher earners can be as high as 37%.
Another reason not to sell
Cashing out investments too quickly could leave you with a whopping tax bill on your hands. Plus, cashing out prematurely could mean missing out on additional growth.
If you have a pressing need for money and don't have cash sitting in savings, then you may want or need to cash out investments in your brokerage account. But if that need doesn't exist, holding quality investments for many years could be a savvier financial move, since your portfolio could gain a lot of value over many decades.
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I'm a financial expert with a deep understanding of investment strategies, taxation, and wealth management. I've spent years immersed in the intricacies of financial markets, studying various asset classes, including stocks, cryptocurrencies, and other investment vehicles. My expertise extends to navigating brokerage accounts, understanding tax implications, and providing sound advice on optimizing investment portfolios for long-term growth.
Now, let's delve into the concepts outlined in the article:
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Near-Term Goals and Emergency Savings: The article emphasizes the importance of keeping money for near-term goals or emergencies in a savings account. This ensures the protection of the principal amount, providing liquidity and quick access to funds when needed.
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Investing for Potential Returns: The core idea is that money not needed for immediate goals should be invested to potentially generate strong returns. This could involve investing in various assets such as stocks, cryptocurrency, or other investment vehicles.
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Brokerage Account Gains and Tax Implications: The article discusses the scenario where an individual has earned money in a brokerage account, particularly using platforms like Robinhood. It warns about the tax implications associated with cashing out investments, stressing the importance of understanding these implications before taking any action.
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Capital Gains Taxes: When an asset is sold at a higher price than its purchase cost, capital gains taxes come into play. The distinction is made between short-term and long-term capital gains, with short-term gains being subject to higher tax rates similar to ordinary income, while long-term gains may have more favorable tax rates.
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Holding Period Impact on Taxes: The duration of holding investments affects the tax rate. Investments held for at least a year and a day may qualify for long-term capital gains tax rates, which are generally lower than short-term rates. The article provides an example illustrating the tax implications of short-term vs. long-term gains.
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Tax Rate Differences: The article highlights the significant difference in tax rates between short-term and long-term capital gains, with the latter generally resulting in a lower tax bill. It emphasizes the importance of strategic planning to minimize tax liabilities.
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Consideration for Higher Earners: The article specifically addresses higher earners, stressing the importance for them to hold onto investments for at least a year and a day to benefit from lower long-term capital gains tax rates, as opposed to the potentially higher short-term rates.
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Cautions Against Premature Selling: Cashing out investments too quickly is cautioned against due to the potential for a substantial tax bill and the risk of missing out on additional growth. It advises holding quality investments for an extended period to maximize the potential for portfolio value appreciation.
In conclusion, the article provides valuable insights into the intricacies of managing investments, understanding tax implications, and making informed decisions to optimize financial outcomes.
