Any capital gain profit you receive from an investment you held for less than a year, is considered a short-term capital gain and is taxed at your ordinary-income rate. If you hold on to the investment for longer than one year, however, capital gains are taxed at a much more favorable long-term capital gains rate.
For millions of Americans, staying invested for more than a year will mean paying the Internal Revenue Service (IRS) nothing at all on capital gains. Even for those in higher income tax brackets, the long-term capital gains rate is significantly lower than the rate on other income. This includes investments held for less than a year which are, again, taxed at the regular income tax rate.
If you only make investments that you’re comfortable holding for ten years, as the Oracle of Omaha says, there’s not a whole lot of reason to sell your position before that one-year milestone on capital gains taxes. Even if you profit in the first year of ownership, and as long as you picked a stock with solid long-term prospects, why wouldn’t you continue to hold on to it? An early profit might mean your investment is a good one that will continue to perform well for years to come. Selling too soon could cost you potential future gains and increase your tax bill.
