What are capital gains and how do they affect me?

If you are interested in or are using Digit Investing, it is important to understand how taxes may impact your account. This article’s aim is to help you understand when you will have to pay taxes on your investments and break down the different rules that come into play when you close investment goals or change your portfolio.

Capital Gains

Capital Gains are the profits you make after selling an investment.
There are two types of capital gains:
  • Short-term gains: profits on investments that you held for less than a year.
  • Long-term gains: profits on investments that you’ve held for more than a year.
The amount of tax you pay is different depending on which type your capital gains fall into. Short-term capital gains are taxed similarly to income and a person’s tax bracket. As of 2022, taxes on long-term capital gains are divided into three brackets and are usually lower than short-term gains.
The three long-term capital gains brackets:
  • 0% - Income falls below $40,000 for a single filer and $80,000 for married couples filing jointly
  • 15% - Income falls below $441,450 for a single filer and $496,600 for married couples filing jointly
  • 20% - Income above the thresholds for 15%
When you update your Digit Investing portfolio, we will first sell your investments for cash, which leads to realizing your gains or losses at that time. The cash will then be invested in the new investment portfolio you choose.
It is also important to keep track of your capital losses, or amount lost when an investment is sold, as well. Capital losses may allow you to deduct the amount from your income tax amounts in a given year, but you do not need to pay taxes on losses.
Remember that while this article is intended to inform users on potential tax implications, if you have specific questions about how your Investments will affect your taxes, please reach out to a qualified tax advisor. Digit does not provide tax advice. You can learn more about capital gains here: https://www.irs.gov/taxtopics/tc409.