Sunday, February 13, 2011

Tax advantages of long term investing

I'd like to discuss the beauty that is called capital gains tax (it's beautiful relative to regular taxes anyway). What's so great about it? Well you are only taxed on HALF of your capital gains.

The basic math:
$1000 income from working (say 30% tax rate) = $300 tax bill ($1000*30%)
$1000 from capital gains (same 30% tax rate) = $150 tax bill ((1/2)*$1000*30%)

When you're investing for the long term, the majority of your wealth creation comes from capital gains. As a result you get to enjoy the very advantageous capital gains tax. Since it's long term you also don't pay the tax for a few years either. Deferred taxes at an advantageous rate? I'll take 3!

Check out this video showing the legendary Warren Buffett (he's probably my hero with Wolverine or something coming in a close second) talking about how he pays a lower % tax rate than his receptionist:



(I'm sort of technically challenged so I can't quite figure out how to insert a YouTube video here .. if anyone wants to let me know in a comment that would be greatly appreciated!!)

EDIT: You guys rock! Thanks for the help getting this video posted!!
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25 comments:

  1. yossarianFebruary 13, 2011 at 9:21 PM

    this looks like a great blog.. i dont have much money to invest right now but as soon as i get some saved up i plan on really getting serious about investing.. i will definitely be following.

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  2. AnonymousFebruary 14, 2011 at 12:45 AM

    a lot of knowledge put into this, following!

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  3. Ion762February 14, 2011 at 1:30 AM

    a lot of great information here nice to think of the future!

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  4. JaceFebruary 14, 2011 at 1:40 AM

    very informative. im looking to start investing soon too.

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  5. marcoandredinisFebruary 14, 2011 at 2:17 AM

    Nice post, really informative. Following!

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  6. Jeff C.February 14, 2011 at 2:18 AM

    Good info, I've been looking for some tips on investing (something I'm rather clueless at right now).

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  7. ThuganomicsFebruary 14, 2011 at 2:19 AM

    yo, saw your comment. what are your plans?

    i'm actually going to work with one of the big4 in the coming months

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  8. ScottFebruary 14, 2011 at 2:21 AM

    @Thuganomics Nice! I am too. Will be starting in September.

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  9. pete jonesFebruary 14, 2011 at 2:22 AM

    Very cool, lots of info

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  10. PhokinggaiiFebruary 14, 2011 at 2:44 AM

    imo people are too lazy and want fast results as opposed to long term benefits even if long term benefits are greater. what do you think? followed!

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  11. AnonymousFebruary 14, 2011 at 5:00 AM

    Interesting man. Thanks.

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  12. ScottFebruary 14, 2011 at 11:18 AM

    @displayed: You're quite right. Fortunately, that is one of the reasons that value investing will always work. If everyone got into it then it would become much harder to find good opportunities and make such great returns.

    Good observation!

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  13. That LlamaFebruary 14, 2011 at 12:23 PM

    Good info. To insert a video click the little film button above the editing block

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  14. ScottFebruary 14, 2011 at 1:02 PM

    @That Llama: Thanks! There is far too much misinformation given to the general public when it comes to investing. I spend a considerable amount of time researching it and hope to help at least a few people.

    As for the video, I tried that but don't actually have the file on my computer. Just want to link from YouTube .. it seems like it requires a different process.

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  15. FTWFebruary 14, 2011 at 3:03 PM

    thx i´ll watch the vid later got no time atm =/

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  16. AnonymousFebruary 14, 2011 at 3:28 PM

    That sounds like a pretty nice saving. I live in the UK though, so not too sure if that applies here too.

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  17. ScottFebruary 14, 2011 at 3:40 PM

    @Jamie I'm not actually surer what the rules are in the UK, but if I had to guess I would say that there is most likely some reduction on capital gains taxable.

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  18. JimFebruary 14, 2011 at 4:09 PM

    You could just embed the video using the options on the video page and the 'edit html' in your blog editor. But anyway, capital gains tax applies to long term investments? Anything else?

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  19. pvFebruary 14, 2011 at 4:11 PM

    good thing im majoring in finance

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  20. WolfdogFebruary 14, 2011 at 4:16 PM

    Thanks for sharing this piece with us i love these types of posts that are more informative then not.

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  21. ScottFebruary 14, 2011 at 4:23 PM

    @Jim Capital gains can be made (and taxed favourably on many different types of investments, including short-term investments in equities (stocks/shares). The main idea is that when you are investing for the long run, the bulk of your gains come from capital gains.. meaning you aren't hit too heavily with taxes.

    If you're trading (rapid fire "investing") you're still making your money on capital gains, but it's (1) speculating, NOT investing and (2) you're paying those taxes AND transaction fees to your broker on many different transactions in a single year. It REALLY eats into your profits. In effect you have to earn much higher returns just to cover the costs.

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  22. JRFebruary 14, 2011 at 4:27 PM

    I want capital gains! The 50% off the taxes would be awesome

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  23. SpongeworthyFebruary 14, 2011 at 4:49 PM

    The youtube link should give you an embed html code, just copy the code into the post using the HTML editor.

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  24. ScottFebruary 14, 2011 at 5:06 PM

    @pv: Given your finance major I can only assume your name is in reference to present value? A true finance geek like myself, haha.

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  25. ASFebruary 19, 2011 at 2:05 AM

    This was helpful. I'm awful with money, unfortunately.

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