Tax on capital earnings

This post is for knowledge sharing only. It is not intended to be investment or tax advice.

In U.S. the tax rate on the capital earnings in 2024 can be as high as

• 20% + 10% + 4% = 34% for long term capital gains and qualified dividends.
• 37% + 10% + 4% = 51% for short term capital gain, ordinary dividends and interests (all taxed as ordinary income).

Notes:

• 20% is the highest federal tax bracket of long term capital gain while 37% is the highest federal income tax bracket. 
• 10% is the CA state income tax. CA tax treats all capital gains as ordinary income, without distinction between short term and long term.
• 4% is the so-called net investment income tax for high income earners, which is less known.

For high income earners, it is really not a good idea to do short-term trading from the tax perspective. Even for long-term trading, one third of the earnings will be paid as taxes.

Instead, the buy and hold strategy may be preferred. Note that there is NO tax on the asset appreciation (unrealized capital gain) until the asset is sold (realized). 

Are there any investments one can keep holding forever without selling them? My answer is low cost index funds! To me, index funds is the revolutionary financial product that makes investment accessible to the public. It is worthy writing a specific blog on more details of index funds.