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The less frequently you sell your assets, the lower the effective tax rate due to capital gains tax. Also, if it's something that generates a return other than through appreciation (e.g. a dividend paying stock or real estate), by holding to it longer, you realize more of the value in a form that doesn't count as a capital gain and so you pay less tax.
Those dividends are capital gains though (or worse, interest income if holding treasuries), and you can't choose when to realize them.
Optimal tax efficiency is selling stock yearly to realize ~$50000 cap gains per year, paying 0% if it's your only income, then immediately rebuying the stock because the wash sale rule only applies to losses.
If you sell all at once you end up in the highest bracket. If you were already in the highest bracket you'll pay the same whether you sell yearly or all at once, but the latter lets you defer the tax.
If you owe any capital gains tax, you're almost certainly already I'm the top tax bracket and you pay less tax the longer you go without selling.
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No, that's not how it works. Capgains are taxed based on a percentage of the appreciation. It's not like a financial transactions tax that is a flat fee every time a trade is made. A 20% gain will be subject to the same tax as 2 equivalent 10% gains would be.
Dividends are taxed at either the personal income tax rate, or the capgains rate if they're qualified dividends.
Yes, but if you have to pay tax on the first 10%, you won't get another 10% gain. Let's say you have a $1,000 investment that grows at 10% per year and the capital gains tax is 25%. If you sell after two years, you'll have gained $210 and pay $52.50 in tax, leaving you with $1,157.50.
If instead you sold and rebought after one year, then you'd have a gain of $100 that year, leaving you with $1,075 after tax. That would give you another gain of $107.50 after the next year, in which you'd pay $26.88 after tax, leaving you with $1,155.62.
It could be in a tax sheltered account though.
Yes, the key part of your two examples being that the guy who stayed in the market the entire time payed slightly more tax at $52.50 vs $51.88 that the guy who rebought after a year, due to the slightly higher principle. In other words, they delayed the tax, but they did not dodge the tax.
So maybe my point up above about being "subject to the same tax" was a bit misleading, and I should have clarified that they pay at the same rate, adjusted for principle. The guy who stays in for two years pays 25% of his gains on his two years, vs the guy who rebalances after one year pays 25% for one year, then 25% for the second year. The important point here is they're not avoiding the tax forever, they're delaying it.
Not sure what you're referencing here other than qualified dividends.
You do avoid some of it though by delaying it. The rate is effectively higher. The original investment was the same in both cases. There was no rebalancing.
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