Investment Strategy and Taxes

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Investment Strategy and Taxes

Whether they pay regular interest or whether you cash them in, investments add to your income, which can add to your tax burden. The taxation of investment gains can be an extremely complex subject, and the more complicated your portfolio, the more likely it is that you will need expert tax advice. Here are a few basic things to be aware of.

Things To Know

  • How long you hold an investment can influence the capital gains tax you must pay.
  • Tax-sheltered investments can let you defer taxes on earnings.
  • Paying for tax advice may be advisable for those who don’t have time to pore over IRS publications.

Capital gains or not?

In order to encourage investment, the government taxes capital gains at a lower rate if you hold them for a certain period. But not all accrued value is capital gains. For instance, even though you might buy a zero coupon bond at a discount and redeem it for much more money, the increased value is interest, not capital gains, and is usually taxed as regular income.

Tax breaks

Some investments, especially funds set up for retirement, provide several ways to shelter your money from taxation. Tax-deferred investments allow funds to build up tax-free in your investment; you pay taxes on your earnings only when you take them out as cash. Other plans permit pre-tax investment—that is, the amount of your income you invest is not subject to tax. Still others permit you to deduct a portion of your invested funds from your income for tax purposes.


Knowing the current state of the tax code regarding investment earnings is a full-time job. With some investments, you must pay tax on your earnings, even though you cannot use them as income. In some instances, a portion of your earnings will be taxed one way, another portion in a different way. Unless you want to spend lots of time reading IRS publications, you should plan to get expert advice—advice you will have to pay for and factor into the cost of your investments.