Source
r/stocks•
FlyingCake

Question - Trading vs. Investing - Who pays more taxes in the end?

I've seen this come up quite often, and would like clarification on this subject. Who ends up paying more taxes between the trader and the investor?

 

Let's say the trader makes 1000$ every year for 3 years. He will pay 30% (for this example) of this capital gain in taxes every year for a total of 900$.

 

If I invest and sell my stocks for a 3000$ capital gain after 3 years, I will still have to pay 900$ in taxes (more or less).

 

What am I missing here? What am I doing wrong? It seems to be that in the end it comes out more or less the same. Off course, your salary and income will dictate how much total tax you'll end up paying each year and that it will tweak the numbers a bit, but overall, if we look at the bigger picture, it seems pretty similar to me..

Posted Nov 23, 2017, 5:34 PM UTC

09
koolbro2012•

if you hold a stock for 1 year...its taxed at 15%

7
Skeptophile•

How about canadians?

1
yoteshot•

Put it in a TFSA : you are allowed 5 000 a year (check with the CRA to see your limit, it should calculate every year since you turned 18; ie. I'm 26 and my TFSA contribution limit is 50K).

The money you put in there is after taxes have been processed, but any gain you make is tax-free (Tax Free Savings Account). Simple as that.

If not in a TFSA, then stocks you hold are not taxable, but if you sell, you'll be taxed on half of the capital gain you declare (same as selling a house).

1
Skeptophile•

Thanks for the explanation!

1
HurrDurr650•

Long term capital gains tax is 15%, which is for stocks which are held for a year or more.

2
spelunker•

Long term capital gains tax means you'll pay more like $450 on tax in the second scenario, not $900.

2
lufecaep•

Pretty much, this even goes for a Roth and a regular IRA. You get a little better tax rate on stock held longer term. But that shouldn't be your major concern. A stock dropping 20, 30% or more while you wait for the tax benefit isn't a very good plan. Traders spend more on stock trading fees though.

2
Sarobot•

In your hypothetical for the trader, let's assume that all the gains are short term (all stocks held for less than a year). The gains would be taxed at their marginal rate, let's say 30% in your example.

For the investor, their gains would be taxed as long term (stocks held for longer than a year). Tax rate will be 15% to 20%.

The government incentivises investing over trading by charging a lower tax. That's the main difference.

1
AvidCircleJerker•

Long term capital gains tax depends on your gross income tax bracket.... It is NOT necessarily 15%. Can be 0%, 15%, or 20%, depending on your annual income.

https://www.fool.com/retirement/2016/12/11/long-term-capital-gains-tax-rates-in-2017.aspx

1