Does Your Original Investment Get Taxed?

No, your original investment is typically not taxed since, in most cases, people invest with the income they have earned, which has already been taxed as ordinary income.

As a trader or investor, you must be aware that your trading profits will attract taxes in most jurisdictions, especially the United States. Long-term investors who hold their shares for more than one year have to pay capital gains tax on the profits generated when they sell them.

Short-term traders who do not hold their shares for over a year have to pay ordinary taxes based on their income tax bracket. However, the taxes are only payable on gains/profits and not on the original investment.

For example, if you deposited $2,000 into your account and made $1,000 in profit, you would owe tax on your profits, not on the entire amount in your trading account, which would have grown to $3,000.

Long-term investors pay capital gains tax ranging from 0% to 15% and 20%, indicating that the tax is capped at 20%. The situation for day traders is different as their capital gains are treated as normal income.

Therefore, day traders could pay up to the maximum tax rate based on their income, unlike long-term investors. It is important for every trader should be aware of this.