Tax Strategies for Investors in Taxable Accounts

Investors who hold assets in taxable brokerage accounts, rather than tax-advantaged retirement plans like IRAs or 401(k)s, may be eligible for preferential tax rates on certain types of investment income—most notably capital gains and dividends.

But to take full advantage of these tax breaks, timing and strategy are crucial. For example, the difference between paying a 15% tax rate versus a 24% rate on a capital gain can come down to holding an investment just one day longer. Similarly, realizing losses from underperforming investments can help reduce your taxable income—if done thoughtfully and before the end of the tax year.

Capital Gains and Losses: What They Are and How They Work

When an investor sells an asset held in a taxable account, the result is either a capital gain (profit) or a capital loss. This is calculated by subtracting the asset’s original purchase price (plus any adjustments) from the sale price.

Example

Buy a stock for $8 and sell it for $12: You have a $4 capital gain.

Sell the stock for $6: You incur a $2 capital loss.

Short-Term vs. Long-Term Gains

The holding period significantly impacts how gains are taxed:

Short-term capital gains (from assets held one year or less) are taxed at your ordinary income tax rate, which can be as high as 37% depending on your income.

Long-term capital gains (from assets held over one year) are taxed at 0%, 15%, or 20%, based on your taxable income.

This distinction is especially important for active or frequent traders, who may unintentionally trigger higher taxes by selling too soon.