Short Term Capital Gains TaxAny money you make on short term trades will be subject to the short term capital gains tax. A short term trade (as defined by the IRS) is any trade where the equity in question was held for less than one year before being sold. Short term gains are taxed at ordinary income tax rates.
Long Term Capital Gains TaxStocks held for more than one year before they are sold will be subject to the lower long term capital gains tax rate.In 2003, the tax rate on long term capital gains was reduced to 15%. 5% for people in the two lowest tax brackets. This was scheduled to expire in 2008. The Tax Increase Prevention and Reconciliation Act signed into law by President Bush in 2006 extended the rate reduction through 2010. However, the budget announced by President Obama in February of 2009 calls for an earlier expiration. Whenever the rate reduction expires, the long term capital gains tax rate will revert to its pre 2003 level of 20%. The lower long term tax rate is meant to encourage long term stock investment. Taxes on stock sales are paid on the net gain. This is what you have left after you've subtracted all your trading expenses. Things like office and computer equipment, trading fees, subscriptions to newsletters, etc.
Can I legaly avoid capital gains tax?The good news is that, though you cannot avoid capital gains tax, you can defer it.The bad news is that the legal means of doing this are complex and not worth pursuing for the small investor.
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