How to Make Money on Investments Without Paying Taxes

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It actually can be done. 

When you invest in stocks, your goal is generally to make money. But ideally, that’s a long-term goal, and you’ll be holding your investments for a long time to achieve it.

Investors who hang onto the stocks in their brokerage accounts for a long time don’t just stand to benefit from share price appreciation, though. They can also, in some cases, avoid having to pay taxes on their gains entirely.

How capital gains taxes work

When you sell an asset at a price that’s higher than what you paid for it, you’re subject to capital gains taxes. So if you own a single share of stock you bought for $100, and its value increases to $250, you’re looking at $150 in capital gains.

From there, capital gains can be classified as short term or long term. Short-term capital gains taxes apply to investments you sell at a profit when you’ve only held them for a year or less. By contrast, if you hold an investment for at least a year and a day before selling it, you’ll be propelled into the long-term capital gains category. And that’s generally a more favorable one to land in.

The tax implications are huge

When you sell a stock at a profit that leaves you subject to short-term capital gains, you’re taxed at your ordinary income tax rate. So if your tax bracket has you paying 22% on ordinary income, that’s what you’ll pay on short-term capital gains, too.

Long-term capital gains come with lower tax rates. And the amount of tax you’ll pay will hinge on your income.

This year, if your income is between $44,625 and $492,300, you’ll be subject to the 15% long-term capital gains tax rate. And if your income exceeds $492,300, you’ll have to pay 20% in long-term capital gains tax.

But if your income is below $44,625, you won’t pay any taxes on long-term capital gains at all. And the savings there could be huge.

Sell your investments strategically

You may be inclined to sell some stocks at a profit the moment their value really starts to pick up. In doing so, though, you could end up liable for short-term capital gains taxes, which are going to cost you more than long-term capital gains taxes no matter what income bracket you fall into.

Of course, there’s another way to score tax-free gains on your investments, and it’s to invest in a Roth IRA. While your Roth IRA contributions won’t be tax-free, your investment gains will be yours to enjoy tax-free.

Once your income reaches $44,625, tax-free long-term capital gains are off the table. But in that case, you can snag some anyway by choosing a Roth IRA.

Roth 401(k) plans work the same exact way. If your employer offers a sponsored retirement plan with a Roth savings feature, it could pay to take advantage of it. Not every 401(k) has a Roth option, but if you like the idea of not having to pay taxes when you make money on your investments, it’s worth looking into one.

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