Why does capital gains tax apply to long term stock holdings?
"Why only long term investments? What do they care if I buy and sell   shares in a company in the same year? Simple, your actually investing when you hold it for a long term. If you hold a stock for a week or a month there is very little that can happen to change the price, in a perfect market the value of a company should stay the same from yesterday to today so long as there is no news(a perfect market cannot exist). When you hold a stock for a long term you really are investing in the company and saying ""this company will grow"". Short term investing is mostly speculation and speculation causes securities to be incorrectly valued. So when a retail investor puts money into something like Facebook for example they can easily be burned by speculation whether its to the upside or downside. If the goal is to get me to invest my money, then why not give apply   capital gains tax to my savings account at my local bank? Or a CD   account? I believe your gains on these accounts are taxed... Not sure at what rate. If the goal is to help the overall health of business, how does it do   that? During an IPO, the business certainly raises money, but after   that I'm just buying and selling shares with other private   shareholders. Why does the government give me an incentive to do this   (and then hold onto it for at least a year)? There are many reasons why a company cares about its market price: A companies market cap is calculated by price * shares outstanding. A market cap is basically what the market is saying your company is worth. A company can offer more shares or sell shares they currently hold in order to raise even more capital. A company can offer shares instead of cash when buying out another company. It can pay for many things with shares. Many executives and top level employees are payed with stock options, so they defiantly want to see there price higher. these are some basic reasons but there are more and they can be more complex." "Most well-off people have investments which they have held for long periods of time, often of very substantial value such as a large part of a company.  They also have influence on legislators and officials through various social contacts, lobbyists, and contributions.  They managed to convince these law makers to offer a lower tax on income derived from sales of such investments.  The fig leaf covering this arrangement is that it ""contributes to the growth of economy by encouraging long-term investment in new enterprises.""" "It's a matter of social policy. The government wants people to make long term investments because that would lead to other long-term government goals: employment, manufacturing, economical growth in general. While speculative investments and day-trading are not in any way discouraged, investments that contribute to the economy as a whole and not just the investor are encouraged by the lower tax rates on the profits. While some people consider it to be a ""fig leaf"", I consider these people to be populists and dishonest. Claiming that long term social goals are somehow bad is hypocrisy. Claiming that short-term trading contributes to the economy as a whole is a plain lie." In Australia we have a 50% capital gain discount if you hold the asset for more than 12 months, whether it is in shares, property or other assets. The main reason is to encourage people to invest long-term instead of speculating or trading. The government sees speculation or short term trading as more risky than long term investing for the everyday mum and dad investor, so rewards people it sees taking the lower risk long term view. In my opinion, long term investing, short term trading and speculation can all be risky for someone who is unedutated in the financial markets, and the first rule of investing should be to consider the asset itself and not the tax implications.
The same applies if you were looking for a business to buy: would you pay more for a business that is doing well making increasing profits year after year, or for a business that is not doing so well and is losing money. A share in a company is basically a small part of a company which a shareholder can own. So would you rather own a part of a company that is increasing profits year after year or one that is continuously losing money? Someone would buy shares in a company in order to make a better return than they could make elsewhere. They can make a profit through two ways: first, a share of the company's profits through dividends, and second capital gains from the price of the shares going up. Why does the price of the shares go up over the long term when a company does well and increases profits? Because when a company increases profits they are making more and more money which increases the net worth of the company. More investors would prefer to buy shares in a company that makes increasing profits because this will increase the net worth of the company, and in turn will drive the share price higher over the long term. A company's increase in profits creates higher demand for the company's shares. Think about it, if interest rates are so low like they are now, where it is hard to get a return higher than inflation, why wouldn't investors then search for higher returns in good performing companies in the stock market? More investors' and traders' wanting some of the pie, creates higher demand for good performing stocks driving the share price higher. The demand for these companies is there primarily because the companies are increasing their profits and net worth, so over the long term the share price will increase in-line with the net worth. Over the short to medium term other factors can also affect the share price, sometime opposite to how the company is actually performing; however this is a whole different answer to a whole different question. There is no generic formula as such, but you can work it out using all known incomes and expenses and by making some educated assuption. You should generaly know your buying costs, which include the purchase price, legal fees, taxes (in Australia we have Stamp Duty, which is a large state based tax when you purchase a property). Other things to consider include estimates for any repairs and/or renovations. Also, you should look at the long term growth in your area and use this as an estimate of your potential growth over the period you wish to hold the property, and estimate the agent fees if you were to sell, and the depreciation on the building. These things, including the agent fees when selling and building depreciation, will all be added or deducted to your cost base to determine the amount of capital gain when and if you sell the property. You then need to multiply this gain by the capital gains tax rate to determine the capital gains tax you may have to pay. From all the items above you will be able to estimate the net capital gain (after all taxes) you could expect to make on the property over the period you are looking to hold it for. In regards to holding and renting the property, things you will need to consider include the rent, the long term growth of rent in your area, and all the expenses including, loan fees and interest, insurance, rates, land tax, and an estimate of the annual maintenance cost per year. Also, you would need to consider any depreciation deductions you can claim. Other things you will need to consider, is the change in these values as time goes by, and provide an estimate for these in your calculations. Any increase in the value of land will increase the amount of rates and the land tax you pay, and generally your insurance and maintenance costs will increase with time. However, your interest and mortgage repayments will reduce over time. Will your rent increases cover your increases in the expenses. From all the items above you should be able to work out an estimate of your net rental gain or loss for each year. Again do this for the number of years you are looking to hold the property for and then sum up the total to give a net profit or loss. If there is a net loss from the income, then you need to consider if the net capital gain will cover these losses and still give you a reasonable return over the period you will own the property. Below is a sample calculation showing most of the variables I have discussed. "You cannot get ""your investment"" out and ""leave only the capital gains"" until they become taxable at the long-term rate. When you sell some shares after holding them for less than a year, you have capital gains on which you will have to pay taxes at the short-term capital gains rate (that is, at the same rate as ordinary income).  As an example, if you bought 100 shares at $70 for a net investment of $7000, and sell 70 of them at $100 after five months to get your ""initial investment back"", you will have short-term capital gains of $30 per share on the 70 shares that you sold and so you have to pay tax on that $30x70=$2100. The other $4900 = $7000-$2100 is ""tax-free"" since it is just your purchase price of the 70 shares being returned to you.  So after paying the tax on your short-term capital gains, you really don't have your  ""initial investment back""; you have something less. The capital gains on  the 30 shares that you continue to hold will become (long-term capital gains) income to you only when you sell the shares after having held them for a full year or more: the gains on the shares sold after five months are taxable income in the year of sale." "If you only have to pay 23k federal taxes on 100k, that means you are in the long term capital gains tax rate, which is the lower of the tax rates available. First you get your federal income tax marginal tax rate, and then find the matching long term capital gains tax rate. For example, if your marginal federal income tax rate is 28%, your capital gains tax rate would be 15%. Or rather, if the amount of the gain would put you in the 28% rate, then your long term capital gains tax rate is 15%. You can reduce that by having more losses. If you have anything else invested anywhere that is taking a loss, then you can sell that this year and it will offset the other gains you have realized. The only note is that your losses have to be long term capital losses too. Tax loss harvesting takes this to an extreme where you sell something at a loss to lock in the tax loss, but you didn't really want to get rid of that investment, so then you buy a nearly identical investment. ie. if you owned shares of ""Direxion Tech Sector ETF"" and it was at a loss, you would sell that and then immediately buy ""ProShares Tech Sector ETF"", the competing product that does the exact same thing. Then there is charity. This still requires spending money and you not having it any longer. If you feel that a cause can use the money more directly than the US government, you can donate an appreciated asset to the charity - not report a gain and also take a charitable deduction." You don't generally pay capital gains taxes until you sell the stock. If you bought it in 2013 and the price goes up in 2014 but you just hold on to the stock, you won't have to pay any taxes on it. If you then sold it in 2015 for a profit, you'd have to pay capital gains taxes on the profit. Note that this excludes dividends. Dividends may complicate the matter somewhat. I'm also assuming you are in the U.S. or Canada, or a country like one of those two. It's possible some other country does taxes differently, though it'd surprise me. Gold ETFs are treated different than stock ETFs, as a collectable. This makes long-term investing in gold ETFs (for one year or longer) subject to a relatively large capital gains tax (maximum rate of 28%, rather than the 15% rate that is applicable to most other long-term capital gains). Read The Gold Showdown: ETFs Vs. Futures for more details. In Canada, it is similarly taxed as CQM states. Mining is considered business income and you need to file a T1 form. Capital appreciation is no different than treating gains from stock. No one can advise you on whether to hold this stock or sell it. Your carried losses can offset short or long term gains, but the long term losses have to be applied to offset long term gains before any remaining losses can offset short term gains. Your question doesn't indicate how long you have to hold before the short term gains become long term gains. Obviously the longer the holding period, the greater the risk. You also must avoid a wash sale (selling to lock in the gains/reset your basis then repurchasing within a month). All of those decisions hold risks that you have to weigh. If you see further upside in holding it longer, keep the investment. Don't sell just to try to maximize tax benefits.