Cash Course: Taxes II: Capital Gains | PragerU Kids

so I was walking through the mall and I oh hold on make it a double shop Blended frappe with almond milk and extra whip oh I'm one of those giant cookies thank you as I was saying Barbara I bought this stock and it went up like 100% in the last month so I sold it and now I'm doing a little bit of shopping what do you mean what kind of taxes capital gains I need to watch an episode of what Capital refers to any asset including money machinery and buildings that's used to generate economic activity Financial capital in the form of money is used by investors to buy Capital assets such as stocks bonds real estate or even alternative Investments like fine art or cryptocurrency hoping they increase or gain in value when it does increase in value this increase is called called a capital gain and these are taxed well it depends currently only once an asset is sold and the gains or profits are realized can an investment be taxed by the federal government but if an investor continues to hold the asset any increase in value is unrealized and won't be taxed for example let's say you bought one share of lemonade Corp for $50 and it increases to $100 shortly afterward that increas increase of $50 is the capital gain if you sell the share and realize the profit that $50 is now subject to a capital gains tax if you have a lot of shares and the asset grows a lot selling it could result in a hefty tax bill for the year you sold it but if I didn't sell and I just held on to it then it wouldn't be taxed that's right the gains would remain unrealized until it was sold nice so how much will I be taxed that also depends Investments bought and sold within one year are considered shortterm and taxed just like your regular income on the other hand Investments sold more than one year after purchase are considered long-term and are taxed at a lower rate this rate can be 0% 15% or 20% and is determined by the amount of taxable income you had the year the asset was sold the difference between short-term and long-term capital gains taxes can be significant for example in 2023 the maximum you could pay in federal income taxes on your regular income was 37% whereas the highest longterm capital gains tax was only 20% the difference is intended to encourage investors to leave their money in the same Investments for longer and therefore stimulate economic growth what if I sold an asset and lost money that's the opposite of capital gain called Capital loss the good news is you can actually use some of your Capital loss to lower your tax taxable income is there a way to avoid paying capital gains tax well one way is to not sell your Investments this is a strategy some investors use by buying assets and then holding them even if they continue to increase in value but then how do they make money they make money by holding assets whose primary value comes from the revenue or cash flow generated by the asset this Revenue could be the income from a rental property artwork rented out to a gallery or a stock that pays a dividend which is a portion of a company's net profits periodically paid to shareholders based on how many shares they hold let's say you purchase one share of lemonade Corp for $50 each and the stock pays a $1 dividend each quarter if the share price increases to $100 throughout the year you would not owe capital gains tax on the $50 appreciation of the stock until you choose to sell however since your one share pays $1 for 4 quarters you would make $4 in dividend income and no taxes h you wish dividends earned will be taxed like your regular income or if it's a qualified dividend it will be taxed at a lower rate similar to long-term capital gains so there's no escaping the taxes huh nope well now that you know something about capital gains let's get you ready for investing one research before you invest make sure to learn about the different tax rules and exceptions for different kinds of Investments pay attention to government policies which can greatly influence what you invest in the shortterm and longterm two plan seek advice from people you know and trust who are active in investing they can help you make a wise plan for beginning to invest and manage taxes doing this properly will help you maximize the returns you get from your Investments and avoid potential pitfalls three pay you shouldn't cheat or get around the rules of paying taxes by not reporting the money you earn but you can check to see if there are legal ways to lower your tax bill talking to professional like a certified public accountant CPA or certified financial planner CFA could help investing can be fun and exciting but it's not all profit all the time understanding capital gains and the taxes on them will help you be a more Savvy investor through the dips and the rips and when Uncle Sam comes knocking for his share actually can I change it to an ice water I need to set aside some gains apparently watch more at prer kids.com and parents don't forget to 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