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I know this is a truly silly question. I won't bother apologizing. The Fool is here to educate me; that's my motto. I'll just ask it quickly and begone.

I own no stocks and intend not to until I understand well and truly all the plusses and minuses. My only investment experience is with Index funds in my 401K. Here's a minus to owning stocks that confuses me.

Promise not to laugh.

I buy stock XYZ on January 1 at price of $P. I hold onto it FOREVER. That's right, I never sell it. Further, it isn't the kind of stock that pays NO dividends.

Do I have to pay any taxes at the end of the first year of owning it simply because it increased in value, i.e. $P changed to, say, $(P*1.2) by December?

In other words, do I only pay taxes when I sell it and therefore incurr a (long|medium|short) term capital gains tax? Or do I just have to pay taxes every year because it's gone up in value. This seems unlikely to me since it means I get taxed on the profit twice.
But then, tax laws have never made sense to me so you can see where I might be confused.

-Tim
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The question isn't all that silly. The answer is that you don't pay taxes on capital gains until you sell the stock. However, if the stock pays dividends, you will pay taxes on the dividends each year as they are paid to you.

Joe Varga
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No question is truly silly unless you asked it before and didn't listen to the (correct) answer.

The answer to the "Or" part of your non-silly question is No. You only pay taxes (or realize a loss) when you sell.

However, dividends paid to you are taxable as ordinary income. If you have more than $400 of them, you have to report on Form 1040, Sechdule B. Less than $400, you can omit Schedule B and just report on Form 1040, Line 9.
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No. You will never pay taxes on unrealized gains in your portfolio. Any short-term or long-term gains and/or losses are the result of a transaction, i.e.-you selling.

TMF has a very nice little book that answers all sorts of tax questions related to investing. I believe it was written by a gentleman who often answers questions on this board. I would suggest you purchase a copy. Not because your question was silly, but because if you want to get involved in investing, this is one aspect you should have a familiarity with.
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Tim asks with montey in handdo I only pay taxes when I sell it and therefore incurr a long | medium | short) term capital gains tax?

Tim You got all the coreect answers form the other osters here. But If you have only bought Index funds (not a bad idea) perhaps you could learn a few things at the FOOL SCHOOL link below... It does give basics, and perhaps you are beyond that... but check out the 13 lessons anyway. You can always learn a little more.
http://www.fool.com/school.htm

Retiring alwasy willing to learn
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