The Tax Laws Favor Capital Gains Over Regular Income!

The government gives tax advantages to capital gains because investments build businesses that provide jobs.

Also, someone with investments is less likely to need government assistance in old age. As a result, traders and investors do not have to pay Social Security and Medicare taxes on stock profits.

Also, there are no taxes for buying stocks!

Taxes do not become a consideration for traders and investors until they sell a stock or fund. At that point, they either have a capital gain or capital loss.

For every sale, you need to figure out which shares were sold.

This information is called the Cost Basis, and is important for figuring out if the sale results in a gain or loss, as well as whether the gain or loss is long term or short term.

A capital gain or loss is Short Term if the sale happened less than a year and a day after the purchase - otherwise it is a Long Term gain or loss.

Long term capital gains are especially favored. While short term gains are taxed at the same rate as your regular income (currently up to 35%), long term gains are currently capped at a maximum rate of 15% (though this cap rises to 20% in 2011).

For stocks and ETFs, you can choose two options for figuring out the cost basis: "First in, First Out" (FIFO) or Specific Shares.

For mutual funds, you have three options: FIFO, Specific Shares, or Average Cost.

You cannot use the Average Cost method for stocks and ETFs.