Knowing your risk tolerance is an important factor in investing. Some investors are willing to take big risks with the potential for big rewards. Others prefer to minimize their losses, even if it means smaller returns.
Determining what type of risk taker you are by taking our risk tolerance quiz can help you decide how best to invest your money. The stock market can be volatile, and the assets and allocations you choose should be those that make you feel comfortable personally and financially — especially for the inevitable dips in the market.
• Your risk capacity: This is your ability to handle risk financially — the amount of money you can afford to lose without impacting your financial security. How close you are to retirement and the financial obligations you have will affect your risk capacity.
• Your needs and wants: These are your goals for your finances and your lifestyle. For instance, maybe you want to retire soon or save up for a down payment on a new house.
• Your emotional risk IQ: This is about your personality and how you see risk. You might be a thrillseeker who likes to live on the edge. Or perhaps you prefer a sure and steady approach.
💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.
Risk Tolerance Quiz
Take this 9 question quiz to see what your risk tolerance is.
⏲️ Takes 1 minute 30 seconds
What Your Risk Tolerance Means
Now that you know whether your investment style is conservative, moderate, or aggressive, you can dig a little deeper to understand what’s driving your specific risk tolerance.
First, of course, there are the goals you’re saving and investing for. Is it retirement? A down payment on a new house? Sending your kids to college? Where your money is going will make you more or less willing to take risks for the potential of higher returns.
Your time-frame is another major factor. If you plan to retire in a few years, you have less time to recover from possible losses, so you’ll likely take a conservative approach to investing. You need your money to be there so you’ll have income to live on in your golden years.
But if you’re a newbie investor in your 20s, you have decades ahead of you with plenty of time to recoup any losses. In that case, you may be more aggressive with your investments to try to maximize your returns. And if you fall someplace in the middle of these two groups, time-wise, you might favor a more moderate investing strategy that balances risk and reward.
Your income is also very important. If you expect your income to grow, you may feel freer to take risks. But if your income is uncertain — maybe you’re a freelancer, for instance — or you don’t anticipate your salary to grow, you might be much more cautious with your money.
Finally, there’s your temperament. If you invest in stocks, for example, are you going to be filled with anxiety every time the market dips? Or are you more or less unflustered by swings in the market?
Thinking about these different factors can give you some insights into your feelings about money.
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Finding Investments That Match Your Risk Tolerance
With this new knowledge in hand, you can invest your money in a way that makes sense for you and the amount of risk you feel comfortable with. These are some scenarios you might want to think about, depending on your investment style.
• Conservative: A conservative investor may opt for a portfolio that mainly consists of funds that tend to be stable and lower risk, such as money market funds and government bonds.
• Moderate: An investor who takes moderate risks might choose to balance their portfolio between riskier assets like stocks and more stable investments like money market funds and bonds.
• Aggressive: This type of investor will likely gravitate to assets with a high potential for return, but also a higher potential for volatility and loss, such as growth stocks and options trading.
Whatever your risk tolerance is, it’s wise to diversify your portfolio across different asset classes including stocks, bonds, and commodities.
The Takeaway
Each investor has a risk tolerance level depending on their individual circumstances. A risk tolerance quiz can help you evaluate how much risk you should take.
That said, it’s vital to know that all investments come with some degree of risk. A conservative investor will likely feel better with lower risk investments, while an aggressive investor will typically look for assets with high growth potential, despite the higher risk they pose.
Once you have investments that suit your style and temperament, the better you may feel about your investment strategy. Just be sure to check your investments regularly to make sure they’re on target to get you where you need to be to meet your financial goals.
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Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
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While each investor may have their own approach to investing, there are some best practices that have been honed over time by those with years of experience.
That’s not to say that one investing strategy is right and another is wrong, or that any strategy is more likely to succeed than another. When it comes to putting your money in the market, there are no guarantees and no crystal balls. But understanding some basic guidelines that have stood the test of time can be beneficial.
Basic Investing Principles
Following are a few fundamentals that hold true for many people in many situations. Bearing these in mind won’t guarantee any outcomes, but they can help you manage risk, investing costs, and your own emotions.
1. The Sooner You Start, the Better
In general, the longer your investments remain in the market, the greater the odds are that you might see positive returns. That’s because long-term investments benefit from time in the market, not timing the market.
Meaning: The markets inevitably rise and fall. So the sooner you invest, and the longer you keep your money invested, the more likely it is that your investments can recover from any volatility or downturns.
In addition, if your investments do see a gain, those earnings generate additional earnings over time, and then those earnings generate earnings, potentially increasing your returns. This is similar to the principle of compound interest.
2. Make It Automatic
One of the easiest ways to build up an investment account is by automatically contributing a certain amount to the account at regular intervals over time. If you have a 401(k) or other workplace retirement account you likely already do this via paycheck deferrals. However, most brokerages allow you to set up automatic, repeating deposits in other types of accounts as well.
Investing in this way also allows you to take advantage of a strategy called dollar-cost averaging, which helps reduce your exposure to volatility. Dollar cost averaging is when you buy a fixed dollar amount of an investment on a regular cadence (e.g. weekly or monthly).
The goal is not to invest when prices are high or low, but rather to keep your investment steady, and thereby avoid the temptation to time the market. That’s because with dollar cost averaging (DCA) you invest the same dollar amount each time, so that when prices are lower, you buy more; when prices are higher, you buy less.
💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.
3. Take Advantage of Free Money
If you have access to a workplace retirement account and your employer provides a match, contribute at least enough to get your full employer match. That’s a risk-free return that you can’t beat anywhere else in the market, and it’s part of your compensation that you should not leave on the table.
By creating a diversified portfolio with a variety of types of investments across a range of asset classes, you may be able to reduce some of your investment risk.
Portfolio diversification involves investing your money across a range of different asset classes — such as stocks, bonds, and real estate — rather than concentrating all of it in one area. Studies have shown that by diversifying the assets in your portfolio, you may offset a certain amount of investment risk and thereby improve returns.
Taking portfolio diversification to the next step — further differentiating the investments you have within asset classes (for example, holding small-, medium-, and large-cap stocks, or a variety of bonds) — may also be beneficial.
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5. Reduce the Fees You Pay
No matter whether you’re taking an active, passive, or automatic approach to investing, you’re going to have to pay some fees to managers or brokers. For example, if you buy mutual or exchange-traded funds, you will typically pay an annual fee based on that fund’s expense ratio.
Fees can be one of the biggest drags on investment returns over time, so it’s important to look carefully at the fees that you’re paying and to occasionally shop around to see if it’s possible to get similar investments for lower fees.
6. Stick with Your Plan
When markets go down, it can feel like the world is ending. New investors might find themselves pondering questions like How can investments lose so much value so quickly? Will they ever go back up? What should I do?
During the crash of early 2020, for example, $3.4 trillion in wealth disappeared from the S&P 500 index alone in a single week. And that’s not counting all of the other markets around the world. But over the next two years, investors saw big gains as markets hit record highs.
The takeaway? Investments fluctuate over time and managing your emotions is as important as managing your portfolio. If you have a long time horizon, you may not need to be overly concerned with how your portfolio is performing day to day. It’s often wiser to stick with your plan, and don’t impulsively buy or sell just because the weather changes, so to say.
💡 Quick Tip: Newbie investors may be tempted to buy into the market based on recent news headlines or other types of hype. That’s rarely a good idea. Making good choices shouldn’t stem from strong emotions, but a solid investment strategy.
7. Maximize Tax-Advantaged Accounts
Like fees, the taxes that you pay on investment gains can significantly eat away at your profits. That’s why tax-advantaged accounts, those types of investment vehicles that allow you to defer taxes, or eliminate them entirely, are so valuable to investors.
The tax-advantaged accounts that you can use will depend on your workplace benefits, your income, and state regulations, but they might include:
• Workplace retirement accounts such as 401(k), 403(b), etc.
Once you’ve nailed down your asset allocation, or how you’ll proportion out your portfolio to various types of investments, you’ll want to make sure your portfolio doesn’t stray too far from that target. If one asset class, such as equities, outperforms others that you hold, it could end up accounting for a larger portion of your portfolio over time.
To correct that, you’ll want to rebalance once or twice a year to get back to the asset allocation that works best for you. If rebalancing seems like too much work, you might consider a target-date fund or an automated account, which will rebalance on your behalf.
9. Understand Your Personal Risk Tolerance
While all of the above rules are important, it’s also critical to know your own personality and your ability to handle the volatility inherent in the market. If a steep drop in your portfolio is going to cause you extreme anxiety — or cause you to make knee-jerk investing decisions – then you might want to tilt your portfolio more conservatively.
Ideally, you’ll land on an asset allocation that takes into account both your risk tolerance and the amount of risk that you need (and are able) to take in order to meet your investment goals.
If, on the other hand, you get a thrill out of market ups and downs (or have other assets that make it easier for you to stomach short-term losses), you might consider taking a more aggressive approach to investing.
The Takeaway
The rules outlined above are guidelines that can help both beginner and experienced investors build a portfolio that helps them meet their financial goals. While not all investors will follow all of these rules, understanding them provides a solid foundation for creating the strategy that works best for you.
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SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Investing can feel like a steep learning curve. In addition to having a clear grasp of types of investment vehicles available and the role investments play in overall financial strategy, it’s a good idea to understand how taxes may affect your investments. Knowing tax implications of various investment vehicles and investment decisions may help an investor tailor their strategy and end up with fewer headaches at tax time.
What Is Investment Income?
Tax requirements for investments can be complicated, and it may be helpful for investors to work with a professional to see how taxes might impact a return on their investment. Doing so might also help ensure that investors aren’t overlooking anything important when it comes to their investments and taxes.
That said, it’s beneficial to enter into any discussion with some solid background information on when and how investments are taxed. Typically, investments are taxed at one or more of these three times:
• When you sell an asset for a profit. This profit is called capital gains—the difference between what you bought an investment for and what you sold it for. Capital gains taxes are typically only triggered when you sell an asset; otherwise, any gain is an “unrealized gain” and is not taxed.
• When you receive money from your investments. This may be in the form of dividends or interest.
• When you have investment income that includes such things as royalties, income from rental properties, certain annuities, or from an estate or trust. This may incur a tax called the Net Investment Income Tax (NIIT).
In the following sections, we delve deeper into each of these situations that can lead to taxes on investments.
💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.
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Tax Rules for Different Investment Income Types
Capital Gains Taxes on Assets Sold
Capital gains are the profits an investor makes from the purchase price to the sale price of an asset. Capital gains taxes are triggered when an asset is sold (or in the case of qualified dividends, which is explained further in the next section). Any growth or loss before a sale is called an unrealized gain or loss, and is not taxed.
The opposite of a capital gain is a capital loss. This occurs when an investor sells an asset at a lower price than purchased. Why would this happen? That depends on the investor. Sometimes, an investor needs to sell an asset at a suboptimal time because they need the cash, for instance.
At other times, an investor may sell “losing” assets at the same time they sell assets that have gained as a way to minimize their overall tax bill, by using a strategy called tax-loss harvesting. This strategy allows investors to “balance” any gains by selling profits at a loss, which, according to IRS rules, may be carried over through subsequent tax years.
There are two types of capital gains, depending on how long you have held an asset:
• Short-term capital gains. This is a tax on assets held less than a year, taxed at the investor’s ordinary income tax rate.
• Long-term capital gains. This is a tax on assets held longer than a year, taxed at the capital-gains tax rate. This rate is lower than ordinary income tax. For the 2023 tax year, the long-term capital gains tax is $0 for individuals married and filing jointly with taxable income less than $89,250, and no more than 15% for those with taxable income up to $553,850. The long-term capital gains tax rate is 20% for those whose taxable income is more than that.
For the 2024 tax year, individuals may qualify for a 0% tax rate on long-term capital gains if their taxable income is $94,050 or less for those married and filing jointly, and no more than 15% if their taxable income is up to $583,750. Beyond that, the tax rate is 20%.
Dividend And Interest Taxes
Dividends are distributions that a corporation, S-corp, trust or other entity taxable as a corporation may pay to investors. Not all companies pay dividends, but those that do typically pay investors in cash, out of the corporation’s profits or earnings. In some cases, dividends are paid in stock or other assets.
Dividends that are part of tax-advantaged investment vehicles are not taxed. Generally, taxpayers will receive a form 1099-DIV from a corporation that paid dividends if they receive more than $10 in dividends over a tax year. All other dividends are either ordinary or qualified:
• Ordinary dividends are taxed at the investor’s income tax rate.
• Qualified dividends are taxed at the lower capital-gains rate.
In order for a dividend to be considered “qualified” and taxed at the capital gains rate, an investor must have held the stock for more than 60 days in the 121-day period that begins 60 days before the ex-dividend date. (Additionally, said dividends must be paid by a U.S. corporation or qualified foreign corporation, and must be an ordinary dividend, as opposed to capital gains distributions or dividends from tax-exempt organizations.)
Both ordinary dividends and interest income on investments are taxed at the investors regular income rate. Interest may come from brokerage accounts, or assets such as mutual funds and bonds. There are exceptions to interest taxes based on type of asset. For example, municipal bonds may be exempt from taxes on interest if they come from the state in which you reside.
Total Investment Income and Net Investment Income Tax (NIIT)
Net investment income tax (NIIT) is a flat 3.8% surtax levied on investment income for taxpayers above a certain income threshold. The NIIT is also called the “Medicare tax” and applies to all investment income including, but not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from businesses involved in trading of financial instruments or commodities.
NIIT applies to individuals with a modified adjusted gross income (MAGI) over $200,000 for single filers and $250,000 for married couples filing jointly. For taxpayers over the threshold, NIIT is applied to the lesser of the amount the taxpayer’s MAGI exceeds the threshold or their total net investment income.
For example, consider a couple filing jointly who makes $200,000 in wages and has a NIIT of $60,000 across all investments in a single tax year. This brings their MAGI to $260,000—$10,000 over the AGI threshold. This would mean the taxpayer would owe tax on $10,000. To calculate the exact amount of tax, the couple would take 3.8% of $10,000, or $380.
Cases of Investment Tax Exemption
Certain types of investments may be exempt from tax implications if the money is used for certain purposes. These investment vehicles are called “tax-sheltered” vehicles and apply to certain types of investments that are earmarked for certain uses, such as retirement or education.
There are two types of tax-sheltered accounts:
• Tax-deferred accounts. These are accounts in which money is contributed pre-tax and grows tax-free, but taxes are taken out when money is withdrawn. For example, a 401(k) retirement account grows tax-free until you withdraw money, at which point it is taxed.
• Tax-exempt accounts. These are accounts—such as a Roth 401(k) or Roth IRA, or a 529 plan—in which money can be withdrawn tax-free if the funds are taken out according to qualifications. For example, money in a Roth account is not taxed upon withdrawal in retirement.
Beyond investing in tax-sheltered accounts, investors may also choose to research or speak with a professional about tax-efficient investing strategies. These are ways to calibrate a portfolio that might help minimize taxes, build wealth, and reach key portfolio goals—such as ample savings for retirement.
The Takeaway
Dividends, interest, and gains can add up, which is why it’s important for a taxpayer to be mindful of investment taxes not only at tax time, but throughout the year. Understanding the implications of sales and keeping capital gains taxes in mind when planning sales can help investors make tax-smart decisions.
Because there are so many different rules regarding taxes, some investors find it helpful to work with a tax professional. Tax law also varies by state, and a tax professional should be able to help an investor with those taxes as well.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
Invest with as little as $5 with a SoFi Active Investing account.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
There are a variety of taxes you may have to pay, such as Income tax, capital gains tax, sales tax, and property tax. Whether you’re new to the workforce or a seasoned retiree, taxes can be complicated to understand and to pay.
This guide can help. Here, you’ll learn more about what taxes are, the different types of taxes to know about, and helpful tax filing ideas. Read on to raise your tax I.Q.
What Are Taxes?
At a high level, taxes are involuntary fees imposed on individuals or corporations by a government entity. The collected fees are used to fund a range of government activities, including but not limited to schools, road maintenance, health programs, and defense measures.
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Different Types of Taxes to Know
Here’s a detailed look at what are many of the different types of taxes that can be levied and the ways in which they’re typically calculated and imposed.
Income Tax
The federal government collects income tax from people and businesses, based upon the amount of money that was earned during a particular year. There can also be other income taxes levied, such as state or local ones. Specifics of how to calculate this type of tax can change as tax laws do.
The amount of income tax owed will depend upon the person’s tax bracket; it will typically go up as a person’s income does. That’s because the U.S. has a progressive tax system for federal income tax, meaning individuals who earn more are taxed more.
If you’re wondering “What tax bracket am I in?” know that there are currently seven different federal tax brackets. The amount owed will also depend on filing categories like single; head of household; married, filing jointly; and married, filing separately.
Deductions and credits can help to lower the amount of income tax owed. And if a federal or state government charges you more than you actually owed, you’ll receive a tax refund. It can be helpful to check the IRS website or online tax help centers to learn more about income tax.
Property Tax
Property taxes are charged by local governments and are one of the costs associated with owning a home.
The amount owed varies by location and is calculated as a percentage of a property’s value. The funds typically help to fund the local government, as well as public schools, libraries, public works, parks, and so forth.
Property taxes are considered to be an ad valorem tax, which means they are based on the assessed value of the property.
Payroll Tax
Employers withhold a percentage of money from employees’ pay and then forward those funds to the government. The amount being withheld will vary, based on a particular employee’s wages, with federal payroll taxes being used to fund Medicare and Social Security.
There are limits on the portion of income that would be taxed. For example, in 2024, a person’s income that exceeds $168,600 is not subject to a common payroll deduction, Social Security tax.
Because this tax is applied uniformly, rather than based on income throughout the system, payroll taxes are considered to be a regressive tax.
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Inheritance/Estate Tax
These are actually two different types of taxes.
• The first — the inheritance tax — can apply in certain states when someone inherits money or property from a deceased person’s estate. The beneficiary would be responsible for paying this tax if they live in one of several different states where this tax exists and the inheritance is large enough.
• The federal government does not have an inheritance tax. Instead, there is a federal estate tax that is calculated on the deceased person’s money and property. It’s typically paid out from the assets of the deceased before anything is distributed to their beneficiaries.
There can be exemptions to these taxes and, in general, people who inherit from someone they aren’t related to can anticipate higher rates of tax.
Regressive, Progressive, and Proportional Taxes
These are the three main categories of tax structures in the U.S. (two of which have already been mentioned above). Here are definitions that include how they impact people with varying levels of income.
What’s a Regressive Tax?
Because a regressive tax is uniformly applied, regardless of income, it takes a bigger percentage from people who earn less and a smaller percentage from people who earn more.
As a high-level example, a $500 tax would be 1% of someone’s income if they earned $50,000; it would only be half of one percent if someone earned $100,000, and so on. Examples of regressive taxes include state sales taxes and user fees.
What’s a Progressive Tax?
A progressive tax works differently, with people who are earning more money having a higher rate of taxation. In other words, this tax (such as an income tax) is based on income.
This system is designed to allow people who have a lower income to have enough money for cost of living expenses.
What’s Proportional Tax?
A proportional tax is another way of saying “flat tax.” No matter what someone’s income might be, they would pay the same proportion. This is a form of a regressive tax and proportional taxes are more common at the state level and less common at the federal level.
Capital Gains Tax
Next up, take a closer look at the capital gains tax that an investor may be responsible for paying when having stocks in an investment portfolio. This can happen, for example, if they sell a stock that has appreciated in value over the purchase price.
The difference in the increased value from purchase to sale is called “capital gains” and, typically, there would be a capital gains tax levied.
An exception can be when an investor sells increased-in-value stocks through a tax-deferred retirement investment inside of the account. Meanwhile, dividends are taxed as income, not as capital gains.
It’s also important for investors to know the difference between short-term and long-term capital gains taxes. In the U.S. tax code, short-term is one year or less, while long-term is anything longer. For tax year 2023, the federal tax rate on gains made by short-term investments are taxed as ordinary income. For long-term investment gains, the rates will be between 0% and 20%, based on filing status and taxable income.
Ideas for tax-efficient investing can include to select certain investment vehicles, such as:
• Exchange-traded funds (ETFs): These are baskets of securities that trade like a stock. They can be tax-efficient because they typically track an underlying index, meaning that while they allow investors to have broad exposure, individual securities are potentially bought and sold less frequently, creating fewer events that will likely result in capital gains taxes.
• Index mutual funds: These tend to be more tax efficient than actively managed funds for reasons similar to ETFs.
• Treasury bonds: There are no state income taxes levied on earned interest.
• Municipal bonds: Interest, in general, is exempted from federal taxes; if the investor lives within the municipality where these local government bonds are issued, they can typically be exempt from state and local taxes, as well.
VAT Consumption Tax
In the U.S., taxpayers are charged a regressive form of tax, a sales tax, on many items that are purchased. In Europe, the system works differently. A VAT tax is a form of consumption tax that’s due upon a purchase, calculated on the difference between the sales price and what it cost to create that product or service. In other words, it’s based on the item’s added value.
Here’s one big difference between a sales tax and a VAT tax:
• Sales tax is charged at the final part of the sales transaction.
• VAT, on the other hand, is calculated throughout each supply chain step and then built into the final purchase price.
This leads to another difference. Sales taxes are added onto the purchase price that’s listed; VAT contains those fees within the price and so nothing extra is added onto the price tag that a buyer would see.
Sales Tax
Ka-ching! You are probably used to sales tax being added to many of your purchases. It’s a method that governments use to collect revenue from citizens, and in America, it can vary by state and local area.
Funds collected via sales tax are frequently used for local and state budget items. These might include school, road, and fire department expenses.
Excise Tax
An excise tax is one that is applied to a specific item or activity. Some common examples are the taxes added to alcoholic beverages, amusement/betting pursuits, cigarettes (yes, the “sin taxes,” as they are sometimes called, gasoline, and insurance premiums.
These taxes are primarily paid by businesses but are sometimes passed along to consumers, who may or may not be aware that these taxes can be rolled into retail prices. Some excise taxes, however, are paid directly by consumers, such as property taxes and certain taxes on retirement accounts.
Luxury Tax
Luxury tax is just what it sounds like: tax on purchases that aren’t necessities but are pricey purchases. It can be paid by a business and possibly passed along to the consumer. Typical examples of items that are subject to a luxury tax include expensive boats, airplanes, cars, and jewelry.
The revenue that’s raised by these taxes may fund an array of government programs designed to benefit U.S. citizens.
Corporate Tax
Here’s another tax with a name that tells the story. Corporate tax is, quite simply, a tax on a corporation’s profits, or taxable income. This is based on a business’ revenue once a variety of expenses are subtracted, such as administrative expenses, the cost of any goods sold, marketing and selling costs, research and development expenses, and other related and operating costs.
Corporate taxes are specific to each country, with some having higher rates than others, and there are a variety of ways to lower them via loopholes, subsidies, and deductions.
Tariffs
Tariffs represent a protectionist tool that governments may use. That is, they are taxes levied on imported goods at the border. The idea is typically that this will help boost the cost of imports and hopefully nudge consumers to buy items made on home soil.
Surtax
A surtax is an additional tax levied by the government in addition to other taxes. It is typically paid by consumers when the government needs to raise funds for a specific program. For instance, a 10% surtax was levied on individual and corporate income by the Johnson administration in 1968. The funds were collected to help fund the war effort in Vietnam.
Tax Filing Ideas
Now that you know what are the different types of taxes, consider the event that makes many of us contemplate this topic: filing taxes. It’s an annual ritual that may trigger anxiety for many, but if you spend a little time educating yourself about the process, it’s not so scary. Here, a few ways to help make preparing for tax season easier:
• Consider how you’d like to file. Choose the method that best suits your needs and comfort level. You might want to work with a professional tax preparer to assist you, or perhaps use tax software to help you through the process. (Some taxpayers will qualify for the IRS Free File service, which is a free guided software tool.)
Another option is to fill out either the IRS form 1040 or 1040-SR by hand and mail it in, but given how this can open you up to human error and handwriting or typing mistakes, it’s not recommended.
• Gather all your paperwork. Being organized can be half the battle here. Develop a system that works for you (you might want to use a tax-preparation checklist) to collect such items as:
◦ Your W-2s and/or 1099 forms reflecting your income
◦ Proof of any mortgage interest paid or property taxes
◦ Retirement account contributions
◦ Interest earned on investments or money held in bank accounts
◦ State and local taxes paid
◦ Donations to charities
◦ Educational expenses
◦ Medical bills that were not reimbursed
• Even if you are lower-income and don’t need to file, consider doing so. It may be to your financial benefit. For instance, you might qualify for certain tax breaks, such as the earned income tax credit (EITC) or, if you’re a parent, the child credit.
• Whether you owe money or are getting a refund, know how to settle your account with the IRS. If you’ll be receiving a tax refund, you may want to request that it be sent via direct deposit to make the process as seamless and speedy as possible. If, on the other hand, you owe money, there are an array of ways to send funds, including payment plans. Do a little research to see what suits you best.
By getting ahead of tax filing deadlines in these ways, you can likely make this annual ritual a little less intimidating and time-consuming.
Understanding the different kinds of taxes can help you boost your financial literacy and your ability to budget well. You’ll know a bit more about why you pay federal and any state and local taxes and also be aware of other charges like luxury taxes and sales taxes.
Here’s another way to help your finances along: by partnering with a bank that puts you first.
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FAQ
What are the most common taxes people use?
The most common taxes that Americans pay are income tax on their earnings, sales tax on purchases, and property tax on their homes.
How many categories of taxes are there?
There are easily more than a dozen kinds of taxes levied in the U.S. Which ones you are liable for will depend on a variety of factors, such as whether you are an individual or represent a business, whether you purchase luxury items, and so forth.
Will I use all of these forms of taxes?
Which forms of taxes you will be liable for will likely depend upon the specifics of your situation. For example, among the most common taxes are income, property, and sales taxes, but if you rent rather than own your home, you won’t owe property taxes. If you purchase a boat, you might pay a luxury tax; if you like to frequent casinos, you could be paying excise taxes.
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A stag is an investor who engages in speculative trading activity. When discussing a stag in stock market terms, you’re using a slang term to talk about day traders who buy and sell securities with a goal of reaping short-term profits.
Stags base their trading strategies around current market movements, relying on technical analysis to help them identify trends, with a focus on initial public offerings (IPOs). That sets them apart from bull and bear speculators, who take a longer view of the market when anticipating price movements.
Stag Definition
Stag isn’t an acronym for anything; instead, it’s a slang term used to describe investors who engage in short-term, speculative trading. Stags aim to benefit from short-term price movements by buying low and selling high. They can trade different types of securities and employ different strategies, either bullish or bearish, in executing trades to achieve maximum profit.
Stags and Market Speculation
To understand stag in stock market terms, it’s helpful to look at the difference between investing and speculation. Investing typically means putting money into the market in the hopes of seeing a long-term result, usually capital appreciation. For example, an investor may purchase 100 shares of a value stock in the hope that those shares will have increased in price by the time they’re ready to sell them 10, 20 or 30 years down the road.
Speculation is different. Investors who engage in market speculation, including stags, focus more on what’s happening in the short term and how they can leverage those trends when trading. Stags will generally accept a higher degree of investment risk in order to turn a profit within a fairly short time frame. They use technical analysis, rather than fundamental analysis, to help them make educated guesses about which way a security is most likely to move.
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Is a Stag a Day Trader?
Investors who follow a day trading strategy buy and sell securities to capitalize on large or small price movements throughout the day. For example, they may buy 100 shares of XYZ stock in the morning and sell those shares in the afternoon before the trading day closes. Some day traders may buy and sell the same stock minutes or even seconds apart in order to lock in profits from fluctuating prices.
Following that line of thought, a stag could be considered to be a type of day trader. Both stags and day traders typically require a sizable amount of capital in order to execute trades aimed at making a short-term profit. They also have to be relatively savvy when it comes to using online brokerage platforms to buy and sell securities. And, of course, they have to be willing to accept the risk that goes along with engaging in speculative day trading.
The stag meaning in the stock market isn’t limited to retail investors, however. Institutional investors can also fall under the stag umbrella if they engage in speculative trading activity. Institutional day traders can work with different financial institutions such as private equity funds and hedge funds to execute speculative trades on their behalf.
💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).
Understanding Stag Trading Strategies
Stag investing revolves around active trading strategies and there are different approaches an investor may take in their efforts to secure short term stock profits. The goal with active trading is to beat the market’s performance whenever possible. Stag investors approach that goal by paying attention to market trends and momentum.
For example, if a security’s price is steadily trending upward a stag investor may speculate as to whether that trend will continue or whether a pullback might happen. If the security’s price drops, the investor may choose to buy shares if they believe that the price will rebound and they can sell those shares at a profit later. They can employ a similar strategy with stocks that are in decline already, if they believe that a price reversal lies ahead.
A stag investor may use a stacking strategy to maximize profits. Stack meaning in stock market terms can refer to different things but when discussing day trading, it means aligning trades to move in the same direction. Assuming the investor’s guess about a security’s price movement proves correct, this strategy could help them to multiply profits.
Stag traders may study stock trading charts in order to identify points of support and points of resistance when tracking price movements. They may be looking for signs that a stock is approaching a breakout, which could suggest a substantially higher price in the future. Stock charts can also be useful for telling a stag investor whether a security’s trading volume is moving bearish or bullish, which can hint at which way prices are likely to move in the near term.
Differences Between Stags, Bulls, and Bears
Stags, bulls, and bears are all different animals, so to speak, when it comes to trading. While stag investors focus primarily on the short term, bull and bear speculators take a longer view of the markets.
Bullish speculators are banking on a rise in stock prices over time. So they may buy securities with the expectation that they can turn around and sell them at a higher price. Bearish speculators, on the other hand, have a more pessimistic outlook in that they expect prices to drop. They may sell off short positions in stocks in anticipation of being able to buy those same securities later at a lower price.
Stag investors can act bullish or bearish in their approach to trading, depending on the overall mood of the market. They may even change from bullish to bearish and back again several times over the course of the same trading day as stock prices rise and fall. Again, that’s not unusual considering the short-term nature of stag trading versus the longer outlook assumed by bull and bear traders.
Do Stags Trade IPO Stocks?
An initial public offering, or IPO, marks the first time a company makes its shares available for trade on a public exchange. Investing in IPOs can be highly speculative, as IPO valuations don’t always align with a company’s performance once it goes public. Some highly anticipated IPOs can end up being flops while other IPOs that fly under the radar initially end up delivering better than expected results to investors.
Stag investors may buy IPO stocks if they believe there’s an opportunity to capitalize on volatility in price movements during the first day or first few days of trading. The challenge with IPO investing is that there isn’t a lengthy track record of performance for the investor to study and analyze. Since the stock hasn’t traded yet, the same technical analysis rules don’t apply.
That means stag investors who are interested in IPOs must do a certain amount of homework beforehand. Specifically, they have to study the financial statements and documents released as part of the IPO process. They also have to take the temperature of the markets to get a feel for how well the company is likely to do once it goes public before deciding what type of bet they’re going to make on that stock’s debut.
IPO Flipping
Since stags typically aren’t looking for long-term positions, it’s not unusual for them to buy IPO shares then resell them in a short period of time. For example, they may buy shares of an IPO in the morning and sell before the first day of trading ends if pricing volatility works in their favor. It’s also possible for stag traders to buy into an IPO before the company begins trading on an exchange, then sell their holdings once trading opens.
This practice is referred to as IPO flipping and it works similar to house flipping, in that the investor seeks to buy low and sell high quickly. Flipping IPO stocks isn’t an illegal practice as far as the Securities and Exchange Commission (SEC) is concerned, though it is generally frowned upon.
Brokerage platforms can enforce an IPO flipping policy that outlines what investors are and aren’t allowed to do in order to discourage this practice. For example, SoFi’s flipping policy may impose limits on future IPO investments and/or fees for traders who are identified as flippers.
Stag Trading Strategy Example
Here’s a simple example of how a stag trading strategy might work.
Say a new company is set to launch its IPO with an expected valuation of $35 per share. After studying the company’s financials and market expectations for the launch, a stag investor decides to buy 1,000 shares of the stock 10 minutes after trading opens. Within an hour of the company going public, investor demand pushes the stock’s price up to $45 per share.
At this point, the stag trader could sell and collect a $10 profit per share, less any commission fees their brokerage charges. But they have a hunch the price may climb even higher before the trading day is done so they hold onto their shares. By 3 pm the stock’s price has climbed to $52 per share, at which point the trader decides to sell.
Of course, this example could have gone the other way. It’s not uncommon for an IPO to open trading at a higher price point and drop throughout the day. If the investor’s hunch had proven wrong and the price dropped to $25 per share, they would have had to decide whether to cut their losses or carry over their position for another trading day to see if the price might turn around.
💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.
The Takeaway
Stag trading is a term used to describe investors who engage in short-term, speculative trading, and stags aim to benefit from short-term price movements by buying low and selling high. This is common when a company issues stock through an IPO, which may allow an opening for a stag to generate quick returns.
IPO investing can be attractive if you’re hoping to get in on the ground floor of an up-and-coming company. You may also be interested in IPO flipping if you’re an active day trader. Given that this is all fairly advanced, it may be best to speak with a financial professional before trying it for yourself.
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