7 Of The Most Asked Questions About Tax On Investments

by Sean on October 16, 2017

The idea of using tax efficiency as a tool to maximize investment benefits is now a common trend among investment managers and trustees. Managing investments in a tax-efficient manner can help improve returns substantially. There are many taxes that are levied on individuals, corporations and other organizations.  Taxes from investment income, interest, dividends, and property or real estate are some of the common levies charged by various governments.

But there’s also a tax on realized capital gains. The amount of tax paid on capital gains will depend on how long an investor holds a given security. As part of wealth management and investment strategy, trustees and investment advisers must consider investment strategies that reduce taxation on capital gains without raising the investment risk.

There are a few questions though, that you need to ask your investment manager about tax investments to ensure that you are as tax efficient as possible.

What is a Taxable Capital Gain?

A capital gain is basically the profit that’s made from the purchase and sale of an asset. For example, if you buy a stock today for $50 per share and later sell it for $60 per share, the taxable capital gain here will be $10. This is the difference between the purchase price and the selling price. Taxes are not levied if no capital gains were realized.

What is the Difference Between Long Term and Short Term Capital Gains?

The taxes levied on capital gains will depend on how long an investor holds on to an asset. This introduces two categories of capital gains; long-term gains and short-term gains. Long-term capital gains refer to capital gains realized after an asset is sold at least after one year since it was purchased. A short-term capital gain is the exact opposite. It’s the gain made on an asset sold in less than one year after its purchase.

Do Capital Gains Taxes Apply to All Financial Instruments?

Yes, all assets traded in the financial markets are eligible for capital gains tax. These include Forex trading, mutual funds, stocks and futures. You can click here to learn more about various assets in the market.

What is Our Strategy for Tax-Efficient Investments?

For someone who has already hired an investment manager to help make their investment decisions, understanding the intricate nature of tax-efficient investing can be quite a challenge. It’s therefore important to ask if the trustee or investment manager is aware of this concept and what strategies they have put in place to ensure you are benefiting. The manager must clearly show investment opportunities that offer more tax incentives on capital gains.

What Impact Does My Investment Strategy Have on After-Tax Returns?

It’s also important to understand how your current investment strategy is affecting your taxes on capital gains. This helps to perhaps change or restructure investment management in order to better take advantage of any tax incentives or to reduce capital gains taxes as much as possible.

Do You Systematically Measure After-Tax Performance?

After-tax performance has to be measured. Your trustee or investment manager must sit with you and explain how your investment performs in relation to taxes. In other words, there needs to be clear data that shows how much tax was levied on assets. The assessment should also recommend ways that can help increase tax efficiency in future investment strategies.

Is My Portfolio Managed Specifically for My Tax Status?

Everybody has a specific tax status. The tax status or bracket of any person will vary a lot over time. It’s therefore important for investment strategies in financial instruments or real assets to be done in a manner that’s consistent with the person’s tax status. This is one of the key steps that can help lay down the required foundation for better tax efficiency moving forward.

Tax efficiency is now becoming an important consideration for many people. Taxes levied on capital gains can often take away a big chunk of investment returns. A tax-efficient investment helps to minimize this impact. If you are not sure whether your investments are tax efficient, the simple questions above will help make things clearer for you.

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