Currently, the Internal Revenue Service taxes gains on stock investments held for one year or less at short-term capital gains rates. These gains are taxed at ordinary income tax rates. However, for investments held more than one year, the gains on stocks are taxed at long-term capital gains rates. Currently, long-term rates are taxed at 15 percent (5 percent for taxpayers in the 10 or 15 percent tax bracket). Although these rates considerably lower the ordinary federal income tax rates, long-term capital gains rates may still generate a sizable federal tax liability.
In order to minimize capital investment tax liability, taxpayers should consider taking advantage of any losses in their portfolio. Taxpayers are able to recognize losses up to $3,000 against ordinary income. In addition, taxpayers are permitted to offset capital gains and losses in excess of $3,000. If taxpayers are holding stocks with losses in their portfolio, they should consider taking advantage of this rule by liquidating these stocks. If a taxpayer still wants to own a stock with a loss, he or she can sell the share and recognize the tax loss and then re-purchase the stock. However, the taxpayer must be sure to avoid the wash sale rules. These rules state a taxpayer must repurchase the shares at least 31 days before or after he or she sold the original shares recognized for tax purposes.