Nathan Bacal Financial

Stocks are a great way to make money since they reflect real growth on top of appreciating to cover the costs of inflation. However, they can also be expensive compared to other investments due to capital gains taxes, and investors are therefore always looking for ways to reduce their taxes on stocks. There are two main ways for saving taxes when investing in stocks, being individual retirement accounts and capital loss tax deductions.

Invest in an Individual Retirement Account

There are plenty of tax advantages to be had by investing in stocks within an individual retirement account, depending on the kind you get. Some will allow you to only pay taxes on the income you deposit and make anything you withdraw including profits tax-free, while other allow you to defer current taxes and only pay taxes when you withdraw.

There are limits to how much you can invest per annum in these accounts which are indexed to your annual taxable income, and you should ensure that you take full advantage of these accounts by putting as much as you can in before putting anything in a non-registered account.

Use Your Capital Losses

Many people don’t realize that just like a capital gain is taxed, capital losses can be used to reduce taxes. If you made a lot of money by selling a profitable stock this year but also have a major loss of value in another stock, you should sell the other stock if it has no hope for improving in the future as it will improve your tax payout by allowing you to use it as a deduction on the capital gains section of your tax form. For example, if you made $20,000 selling one stock, but lost $22,000 by selling another, you will have a net tax loss of $2,000 and won’t pay capital gains taxes.

This is not to say you should sell every stock that’s currently at a loss in order to avoid paying taxes on your successful payouts. Value invested stocks often fluctuate over time, so it makes little sense to sell them in the short term for a tax benefit when it means you ultimately lose money. However, if you invested in Pump-and-Dump Incorporated and it is obvious that you have no hope of ever seeing your money again, selling the stock can be useful.

Keep in mind that there are some limitations on using capital losses. If you sell a stock at a loss and repurchase it within a certain timeframe, it will not be counted as a loss until you resell the repurchased stock. So, don’t sell stock just before the tax year ends and repurchase it right after and think that you can avoid taxes this way, as you’ll only be taking a loss for no reason and paying extra commissions on your trade with no tax benefits whatsoever.