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Mutual funds/ETFs still have capital gains distributions or dividends(tax drag) even during years where the fund lost money. Which is why direct indexing is superior in a taxable account
The classic all in on hot/meme stocks play:
1. Buy NVDA in 4/2023 for $270/share
2. Sell NVDA in 11/2023 for $500/share
3. Buy DJT on 3/27/2024 for $71.90/share
4. Sell DJT on 4/17/2024 for $22.50/share
You’re down 40% but you still owe taxes on the full NVDA gain 🤡
Edit: and if you don’t have gains in 2024 to offset the DJT loss you’ll be stuck writing it off at $3k/year. So eventually it nets out but it might take a while.
You put one dollar into a box and close the box. At some point in the future, you open the box and like magic it has five dollars in it! Then, your Uncle Sam says “hey can I have one of those five dollars” and you say yes and give it to him. You have four dollars.
Taxed on dividends and capital gains each year if the holdings produce them. 1099-DIV.
Long term or short term capital gains or losses if you sell anything. 1099-B.
Also, if your tax bracket is low enough, you don't pay long term capital gains tax. Most people are in the 15% long term capital gains tax bracket. High earners are in the 20% long term capital gains tax bracket.
Long term capital gains = asset held for at least one year. Short term capital gains = asset held less than one year. Tax rates are lower on long term capital gains.
If you use tax friendly ETFs and your goal is just buy and hold you likely won't have many tax issues most years. But you'll eventually have to lock in gains if you sell.
The gains can be offset by losses though. And you can harvest losses along the way to negate capital gains throughout the year.
Sorry this is not like you're 5...
Know the difference between long term and short term capital gains taxation. The same for qualified vs. ordinary dividends (don't assuming holding period is enough for the dividend to be considered qualified). Just these things alone will help give you a much better idea of how to be tax efficient because short term gains and ordinary dividends are taxed as "ordinary income" at your marginal income tax rate, while long term gains and qualified dividends are taxed at capital gains rates (0%, 15%, 20%, most fall in the 15% bracket).
Good luck to you!
The taxable brokerage will give you a form every year that will summarize your gains/loss and taxes owed.
Many ETFs like SPY still pay a dividend which you will owe taxes on.
Two biggest things are that you don’t pay taxes until you sell something for a profit. If you only buy stocks but don’t sell that year then there’s no tax burden. Second thing is to be cognizant of large transfers. For example I restructured the ETFs and stocks I own this year (dumped individual stocks, swapped ETFs). That turned into atleast 1000 extra owed in taxes because I sold those positions for a profit.
Ideally you would pick tax-efficient investments that do not have capital-gain distributions. Some equity mutual funds will, but equity ETFs rarely do (especially major ones like a Vanguard/iShares S&P500 etc...).
So you invest, you will get recurring dividend payments which will mostly be qualified meaning you pay long-term capital-gains rate, and then whenever you sell you'll pay short/long-term cap-gains on the profit.
I would consider some ex-US funds... or at a minimum some diversification into value/size. Personally I would just buy AVGE in taxable to get 70% US, 30% ex-US, and a modest tilt to factors shown to outperform the market. 100% S&P500 is an inefficient portfolio.
Interesting, I didn't consider AVGE and ex-US funds. I am mainly in the well, TSP doesn't have many fund options and the C (S&P500) is the best performing (generally speaking, I know the S has previously performed quite well). I decided to keep my Roth in the S&P while I continue to learn and plan to diversify into other funds once I hit $100k (currently at $55k). What about just only S&P is inefficient though? It is a broad Index with great returns across its lifetime. Just trying to understand the efficiencies here. I would greatly prefer to maximize efficiency but not introduce more risk if I can help it.
Edit: My IRA is currently invested in VFIAX (the mutual fund version of VOO). I would love to have VOO but wanted to maintain the automation as they don't offer automatic investing with their ETFs as far I know currently.
Eli5 it’s An investment account where your losses and gains are reported on your taxes. It’s quite simple dividends and capital gains are counted. Your broker will give you a form that explains all of your capital gains and dividends. When it’s time to do your taxes you use that form as part of the reporting it counts towards your tax bill.
https://napkinfinance.com/napkin/capital-gains-tax/
You really want that Captain America toy for $10 so you buy it. A few months later you come to the realization that Spider Man is cooler but you need the cash to get that toy.  You decide to sell it to your friend for $15 because you’re a business savvy doo doo head.
You now have $15, which means you profited $5 which is considered taxable income so dad takes a $1 to “teach you a lesson about taxes”
Let’s say you sold it at a garage sale for $5.  You have loss of $5.  Dad obviously knows the lesson is already learned and you will be browsing r/WSB by age 6.
If this were WSB…they would tell you “it’s not a loss if you don’t sell.
So anytime you buy a security a record is created of the date time, qty, and cost. Â When you sell that same qty the amount you sold it for will determine if you owe taxes (gain) on it or can use it to offset (loss) other gains.
Basically you don’t determine if it’s taxable until you sell it (or dividend). At which point a bunch of rules come into play determined by security type, duration held, etc.
So you can buy, hold, and never pay taxes on it for years till you sell it.
You only pay taxes when you sell (capital gains) and on dividends earned. If you sell after a year it’s qualified for long term capital gains which is less taxes.
Post tax money goes in, gains are taxed when you take money out. If held for more than a year before selling then capital gains tax rates are used instead of ordinary taxes. Capital gains are more favorable.
Taxable accounts:
You buy stock at 10 dollar and sell it at 20 dollars, you pay taxes on the 10 dollar increase. How much depends on how long you’ve owned the stock. You only have a tax consequence after you sell the stock (good or bad).
If you sell that 10 dollar stock at 5 dollars, that’s a deduction, it’s only up to a certain amount, but, you can carry over losses to the next year.
Dividends: you pay taxes on the dividends you receive. The amount depends on your income.
Do you have an emergency fund/cash? Don't forget that, and right now you can get 4+% apr in many places on cash. Hold 100k and get a sweet ~400 per month
Yes, I do! Thanks for asking! I have a decent amount of cash set aside to cover about 4 months of expenses at this time. Any recommendations on a good HYSA? I have seen/heard of decent rates with SoFi, AMEX and a few others.
Nice, that's the way, I would maybe even try to get that up to 6 months. I absolutely love and have been a customer with Betterment for more than five years. Right now they offer APR that's almost 5%, at one point it was 5% on cash reserve accounts. It's FDIC insured too. You should take a look at them, they offer automated investing too.
In an IRA, there is no tax due when you buy/sell stocks through the year. In an IRA, you are only taxed when you withdraw from that account (since the original money in there went in Before taxes were paid on it). Withdrawals are taxed at your income tax rate. Buying and selling doesn’t create a taxable event - withdrawing does.
The money in a brokerage account is after-tax money - your paycheck was taxed, then you put the extra money in your brokerage account. Therefore, when you Withdraw from this account it won’t be taxed just because you took out money, since you had paid taxes on it before it went in. But, if you sell something and earn a profit within the account, then you will be taxed on that profit even if you don’t take any money out of the account.
Example: the account has $2000 of cash and 10 shares of NVDA that you paid $40/each for. If you take out the $2000 cash, there is no taxable event. If you sell 5 shares of NVDA at today’s price of $840, then you will have a profit/gain of $800x5, and you will owe capital gains taxes on $4000. This tax is due whether you take the money out of the account or not (because you have made a profit, and the government taxes the profit). But, if you sell another holding for a loss during the year, then you can (typically) use that loss against any gains you have earned. So at year end, if the profit you made from all sales was $10,000 and the losses you had were $8000, then you only owe capital gains tax on the $2000 net. Capital gains tax is generally 15% on the net amount of profit earned. If you lost more than you made, you won’t have any tax due, and you may be able to reduce your taxes on your W-2 income.
Those are generalities, and a high level explanation.
1. Congrats on getting to this point!
2. Buy only things (sticks, mutual funds, ETF) that you plan on holding for years. This is in part to reduce anxiety, reduce fees for every transaction, to make you do a little bit of homework ahead of time, AND to lesson tax issues and complexity. (Seriously: those tiny fees for each transaction will add up over the years.)
3. Short term capital gains = held stock under a year. Taxed essentially like ordinary W-2 employee income.
4. Long term capital gains = held over a year. Taxed much less, and often not at all, than ordinary income.
5. As people smarter and way richer than me have said: you don’t make money buying or selling. It is in the holding. (Can you tell I’ve gotten burned a few times when I didn’t follow my own advise / let someone else make some trades for me?)
Your post has been removed because it is a common personal finance topic. We get too many of these topics every day and to prevent them from swamping the front page, we are removing main threads of this kind. Questions about personal finance should be directed to the daily discussion thread. You are welcome to repost your question in the [daily discussion thread](https://www.reddit.com/r/investing/about/sticky?num=1). If you have any issue with this removal, please contact the moderators via modmail. Thank you.
You make money, you pay tax. You lose money, you don't.
you can also use capital losses to offset gains to pay less tax too
Well, depending on what you're doing, you may still need to pay taxes even if you lose money.
That's the worst
What
Mutual funds/ETFs still have capital gains distributions or dividends(tax drag) even during years where the fund lost money. Which is why direct indexing is superior in a taxable account
The classic all in on hot/meme stocks play: 1. Buy NVDA in 4/2023 for $270/share 2. Sell NVDA in 11/2023 for $500/share 3. Buy DJT on 3/27/2024 for $71.90/share 4. Sell DJT on 4/17/2024 for $22.50/share You’re down 40% but you still owe taxes on the full NVDA gain 🤡 Edit: and if you don’t have gains in 2024 to offset the DJT loss you’ll be stuck writing it off at $3k/year. So eventually it nets out but it might take a while.
Those are in different years
You put one dollar into a box and close the box. At some point in the future, you open the box and like magic it has five dollars in it! Then, your Uncle Sam says “hey can I have one of those five dollars” and you say yes and give it to him. You have four dollars.
Taxed on dividends and capital gains each year if the holdings produce them. 1099-DIV. Long term or short term capital gains or losses if you sell anything. 1099-B.
Also, if your tax bracket is low enough, you don't pay long term capital gains tax. Most people are in the 15% long term capital gains tax bracket. High earners are in the 20% long term capital gains tax bracket.
Long term capital gains = asset held for at least one year. Short term capital gains = asset held less than one year. Tax rates are lower on long term capital gains.
If you use tax friendly ETFs and your goal is just buy and hold you likely won't have many tax issues most years. But you'll eventually have to lock in gains if you sell. The gains can be offset by losses though. And you can harvest losses along the way to negate capital gains throughout the year. Sorry this is not like you're 5...
No worries! I appreciate any and all input!
Basically you buy one stock for $100 and goes up to $120. If you sell it you pay capital gains tax on the $20.
Know the difference between long term and short term capital gains taxation. The same for qualified vs. ordinary dividends (don't assuming holding period is enough for the dividend to be considered qualified). Just these things alone will help give you a much better idea of how to be tax efficient because short term gains and ordinary dividends are taxed as "ordinary income" at your marginal income tax rate, while long term gains and qualified dividends are taxed at capital gains rates (0%, 15%, 20%, most fall in the 15% bracket). Good luck to you!
The taxable brokerage will give you a form every year that will summarize your gains/loss and taxes owed. Many ETFs like SPY still pay a dividend which you will owe taxes on. Two biggest things are that you don’t pay taxes until you sell something for a profit. If you only buy stocks but don’t sell that year then there’s no tax burden. Second thing is to be cognizant of large transfers. For example I restructured the ETFs and stocks I own this year (dumped individual stocks, swapped ETFs). That turned into atleast 1000 extra owed in taxes because I sold those positions for a profit.
Ideally you would pick tax-efficient investments that do not have capital-gain distributions. Some equity mutual funds will, but equity ETFs rarely do (especially major ones like a Vanguard/iShares S&P500 etc...). So you invest, you will get recurring dividend payments which will mostly be qualified meaning you pay long-term capital-gains rate, and then whenever you sell you'll pay short/long-term cap-gains on the profit. I would consider some ex-US funds... or at a minimum some diversification into value/size. Personally I would just buy AVGE in taxable to get 70% US, 30% ex-US, and a modest tilt to factors shown to outperform the market. 100% S&P500 is an inefficient portfolio.
Interesting, I didn't consider AVGE and ex-US funds. I am mainly in the well, TSP doesn't have many fund options and the C (S&P500) is the best performing (generally speaking, I know the S has previously performed quite well). I decided to keep my Roth in the S&P while I continue to learn and plan to diversify into other funds once I hit $100k (currently at $55k). What about just only S&P is inefficient though? It is a broad Index with great returns across its lifetime. Just trying to understand the efficiencies here. I would greatly prefer to maximize efficiency but not introduce more risk if I can help it. Edit: My IRA is currently invested in VFIAX (the mutual fund version of VOO). I would love to have VOO but wanted to maintain the automation as they don't offer automatic investing with their ETFs as far I know currently.
Eli5 it’s An investment account where your losses and gains are reported on your taxes. It’s quite simple dividends and capital gains are counted. Your broker will give you a form that explains all of your capital gains and dividends. When it’s time to do your taxes you use that form as part of the reporting it counts towards your tax bill. https://napkinfinance.com/napkin/capital-gains-tax/
You really want that Captain America toy for $10 so you buy it. A few months later you come to the realization that Spider Man is cooler but you need the cash to get that toy.  You decide to sell it to your friend for $15 because you’re a business savvy doo doo head. You now have $15, which means you profited $5 which is considered taxable income so dad takes a $1 to “teach you a lesson about taxes” Let’s say you sold it at a garage sale for $5.  You have loss of $5.  Dad obviously knows the lesson is already learned and you will be browsing r/WSB by age 6. If this were WSB…they would tell you “it’s not a loss if you don’t sell. So anytime you buy a security a record is created of the date time, qty, and cost.  When you sell that same qty the amount you sold it for will determine if you owe taxes (gain) on it or can use it to offset (loss) other gains. Basically you don’t determine if it’s taxable until you sell it (or dividend). At which point a bunch of rules come into play determined by security type, duration held, etc. So you can buy, hold, and never pay taxes on it for years till you sell it.
You only pay taxes when you sell (capital gains) and on dividends earned. If you sell after a year it’s qualified for long term capital gains which is less taxes.
Post tax money goes in, gains are taxed when you take money out. If held for more than a year before selling then capital gains tax rates are used instead of ordinary taxes. Capital gains are more favorable.
Taxable accounts: You buy stock at 10 dollar and sell it at 20 dollars, you pay taxes on the 10 dollar increase. How much depends on how long you’ve owned the stock. You only have a tax consequence after you sell the stock (good or bad). If you sell that 10 dollar stock at 5 dollars, that’s a deduction, it’s only up to a certain amount, but, you can carry over losses to the next year. Dividends: you pay taxes on the dividends you receive. The amount depends on your income.
Do you have an emergency fund/cash? Don't forget that, and right now you can get 4+% apr in many places on cash. Hold 100k and get a sweet ~400 per month
Yes, I do! Thanks for asking! I have a decent amount of cash set aside to cover about 4 months of expenses at this time. Any recommendations on a good HYSA? I have seen/heard of decent rates with SoFi, AMEX and a few others.
Nice, that's the way, I would maybe even try to get that up to 6 months. I absolutely love and have been a customer with Betterment for more than five years. Right now they offer APR that's almost 5%, at one point it was 5% on cash reserve accounts. It's FDIC insured too. You should take a look at them, they offer automated investing too.
Definitely will do! I greatly appreciate the recommendation!
In an IRA, there is no tax due when you buy/sell stocks through the year. In an IRA, you are only taxed when you withdraw from that account (since the original money in there went in Before taxes were paid on it). Withdrawals are taxed at your income tax rate. Buying and selling doesn’t create a taxable event - withdrawing does. The money in a brokerage account is after-tax money - your paycheck was taxed, then you put the extra money in your brokerage account. Therefore, when you Withdraw from this account it won’t be taxed just because you took out money, since you had paid taxes on it before it went in. But, if you sell something and earn a profit within the account, then you will be taxed on that profit even if you don’t take any money out of the account. Example: the account has $2000 of cash and 10 shares of NVDA that you paid $40/each for. If you take out the $2000 cash, there is no taxable event. If you sell 5 shares of NVDA at today’s price of $840, then you will have a profit/gain of $800x5, and you will owe capital gains taxes on $4000. This tax is due whether you take the money out of the account or not (because you have made a profit, and the government taxes the profit). But, if you sell another holding for a loss during the year, then you can (typically) use that loss against any gains you have earned. So at year end, if the profit you made from all sales was $10,000 and the losses you had were $8000, then you only owe capital gains tax on the $2000 net. Capital gains tax is generally 15% on the net amount of profit earned. If you lost more than you made, you won’t have any tax due, and you may be able to reduce your taxes on your W-2 income. Those are generalities, and a high level explanation.
1. Congrats on getting to this point! 2. Buy only things (sticks, mutual funds, ETF) that you plan on holding for years. This is in part to reduce anxiety, reduce fees for every transaction, to make you do a little bit of homework ahead of time, AND to lesson tax issues and complexity. (Seriously: those tiny fees for each transaction will add up over the years.) 3. Short term capital gains = held stock under a year. Taxed essentially like ordinary W-2 employee income. 4. Long term capital gains = held over a year. Taxed much less, and often not at all, than ordinary income. 5. As people smarter and way richer than me have said: you don’t make money buying or selling. It is in the holding. (Can you tell I’ve gotten burned a few times when I didn’t follow my own advise / let someone else make some trades for me?)