Let’s be honest: nobody likes taxes. But if you’re investing, ignoring them can cost you big time. Taxes quietly chip away at your profits, and while they might not be front of mind when you’re picking stocks or celebrating gains, understanding how they work is non-negotiable for long-term success.

This guide breaks down the essentials—plus some lesser-known strategies—to help you keep more of what you earn. Let’s dive in.

Why Taxes on Investments Matter

Most people focus on growing their portfolio, but few think about what they’ll actually keep after taxes. Here’s the kicker: two investors could both make 10% on their portfolios, but if one is strategic about taxes, they might keep 9%, while the other only keeps 8%. That difference compounds over time.

Bottom line: It’s not just what you make—it’s what you keep that counts.

The 3 Big Investment Taxes You Need to Know

The IRS taxes investments in a few different ways, and each impacts your bottom line differently:

1. Capital Gains Tax

This applies when you sell an investment for a profit.

• Short-term capital gains: Taxed as ordinary income (up to 37%). Applies if you hold an asset for a year or less.

• Long-term capital gains: Taxed at 0%, 15%, or 20%, depending on your income. Applies if you hold for more than a year.

Pro Tip: The longer you hold, the lower your tax rate—so don’t panic sell.

2. Dividend Tax

If you own dividend-paying stocks, you’ll pay taxes on the income they generate.

• Qualified Dividends: Taxed at the lower long-term capital gains rate.

• Ordinary Dividends: Taxed at your regular income rate.

Quick Insight: Investing in companies that pay qualified dividends can boost your tax efficiency.

3. Taxes on Retirement Accounts

Different retirement accounts have their own tax rules:

• Traditional 401(k)/IRA: Contributions are tax-deferred, but withdrawals are taxed as income.

• Roth IRA: Contributions are taxed upfront, but withdrawals in retirement are tax-free.

Pro Tip: Roth accounts are gold if you expect to be in a higher tax bracket down the road.

3 Simple Strategies to Cut Your Tax Bill

1. Harvest Your Losses

Not every investment will be a winner, but you can make losses work for you. Tax-loss harvesting lets you sell losing investments to offset your taxable gains.

Example: You made $10,000 in capital gains but lost $3,000 on another stock. Harvesting that loss reduces your taxable gains to $7,000.

And if your losses exceed your gains? You can deduct up to $3,000 against regular income and carry the rest forward.

2. Use Tax-Advantaged Accounts

Max out accounts like 401(k)s, IRAs, and HSAs (Health Savings Accounts). These accounts offer tax perks like deferred taxes or tax-free withdrawals, meaning less money to the IRS.

3. Pick Tax-Efficient Investments

Some investments are naturally more tax-friendly:

• ETFs: Generally more tax-efficient than mutual funds.

• Municipal Bonds: Interest is often federal tax-free (and sometimes state tax-free too).

Avoid These Common Tax Traps

1. Ignoring Wash-Sale Rules: If you sell a stock at a loss and repurchase it within 30 days, the IRS disallows the loss for tax purposes.

2. Overtrading: Frequent buying and selling racks up short-term gains, which are taxed at higher rates.

3. Neglecting Recordkeeping: Track your cost basis (what you paid for an investment) to avoid overpaying taxes.

Final Thoughts

Taxes on investments can feel overwhelming, but with a little knowledge, they’re completely manageable. By using strategies like tax-loss harvesting, holding investments long enough to qualify for lower capital gains rates, and leveraging tax-advantaged accounts, you’ll keep more of your hard-earned gains.

Because at the end of the day, investing isn’t just about growing your money—it’s about keeping it.

Disclaimer: The information presented is for educational purposes only and not an offer or solicitation for any specific investments. Investments involve risk and are not guaranteed. Consult with a financial adviser before making any investment decisions. Past performance does not guarantee future results.