I don’t know about you, but for me, paying taxes feels like a giant slap in the face.
I’m minding my own business, feeling good about what I earned during the year, and then all of a sudden, out of nowhere, SLAP! It physically hurts.
So I try to do everything I can to minimize the amount of taxes I have to pay on my investments.
From talking with my friends and family, it strikes me that most people aren’t aware of two ways they can minimize their tax bills. Two insider tips: one for today (capital gains) and one for tomorrow (tax loss harvesting).
Minimize your capital gains
Most investors are familiar with the idea that they’re taxed on what they earn: If you buy a stock and sell it at a higher price, the difference is usually subject to a capital gains tax.
But what surprises a lot of people is that it’s possible to owe capital gains taxes even if you didn’t sell your fund at a gain during the year. Why? Because mutual funds and ETFs also buy and sell securities during the year, so they can incur gains, too. Funds are required to pass those gains on to you by December 31 every year. (See here for the mechanics from the fund’s perspective.)
Free money in the mail? Sounds like a great deal, right? Wrong.