Stock investors, traders and dealers face different tax implications depending on their trading activities and holding period for stocks they own. Maximizing your tax deductions is one way to help increase profits and keep more of what’s yours!
One way to lower taxes is through investing in funds and ETFs with tax-saving features, or contributing to tax-deferred accounts such as an IRA or 401(k).
1. Buy and Hold Strategy
This investing strategy rests on the belief that over time, stock markets tend to gain in value. It takes an upstream approach with compound interest for maximum returns.
Investors purchasing shares in companies with strong growth potential often hold them for extended periods, reaping dividends and stock splits that increase their number of shares as well as reaping the benefits from an increasing value and stock price for these firms.
Although it can be challenging to apply during market downturns, Buy and Hold strategies are an effective way to protect investments against impulsive decisions that lead to temporary losses. Furthermore, eliminating frequent trading reduces transaction fees and taxes significantly.
Active investing entails trying to profit from market timing. This requires successfully buying and selling at exactly the right moment, which can be challenging to do successfully. Furthermore, every trade incurs brokerage fees and taxes which quickly reduce returns.
2. Invest in Opportunity Zones
Opportunity zones were first introduced by the Tax Cuts and Jobs Act of 2017 as part of its “Opportunity Zones Initiative.” They provide investors with incentives to invest in low-income communities that have been overlooked for too long – deferral of capital gains taxes or even outright elimination – including deferring them entirely in some instances. Investors can invest through qualified opportunity funds, real estate purchases or businesses situated in designated opportunity zones.
Research to date on opportunity zone investments indicates its early success; for example, studies suggest they have higher bachelor degree holder populations and median home prices than areas without investments.
Not to forget is that the incentive period for opportunity zones ends in 2026 and thus investors need to plan carefully in order to take full advantage of them. They should carefully compare costs associated with investing in an opportunity fund versus simply avoiding capital gains taxes.
3. Donate Stock to Charities
Stock donations offer investors an effective strategy for making an impactful statement about their giving while simultaneously reaping tax advantages, yet many fail to take advantage of it.
Donating stock directly to charities is an excellent way for donors to avoid capital gains taxes while increasing itemized deductions. Nonprofits that actively encourage and accept non-cash assets typically see revenue growth 66% faster than those that don’t accept non-cash assets as donations.
Donations of shares held for more than one year qualify as tax deductible donations; otherwise, investors would only be entitled to claim the cost-basis deduction (the price they paid).
Charity organizations need a finance or accounting team dedicated to managing brokerage accounts in order to maximize stock donation receipts, so any shares received are immediately valued for donor tax receipts and processed.
4. Deduct Brokerage Fees
Active investors often encounter fees that eat away at their returns. From expenses that increase with each investment purchase and sale to trading commission charges and advisor fees, fees can quickly add up over time and drain away at returns.
Brokerage fees may qualify as tax deductible expenses if they’re considered trade or brokerage expenses and contribute directly to producing investment income. They should only be deducted if such expenses are both reasonable and necessary in producing your income from investment assets.
Before the Tax Cuts and Job Act was signed into law, these fees could be claimed as miscellaneous itemized deductions up to 2% of your adjusted gross income. Now that this deduction has been disallowed by TCJA, investors will need other strategies in order to minimize their taxes; but these strategies can help maximize investment returns while saving on taxes.