Kinds of Income

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Holloway Guide ToEquity Compensation

Kinds of Income

Common questions covered here
What is the difference between ordinary income and capital gains?
For tax purposes, what are the different types of income?
What do I need to do to qualify for long-term capital gains?
For tax purposes, when are capital gains considered short-term?

Definition Income is the money an individual makes. For tax purposes, there are two main types of income, which are taxed differently. Ordinary income includes wages, salary, bonuses and interest made on investments. Capital gains are the profits an individual makes from selling assets, including stock.

One key difference between ordinary income and capital gains is that when capital gains taxes are calculated, consideration is given not just to the sale price of the asset but to the total gain or loss the investment incurred, each outcome having significantly different tax consequences.

Definition Capital gains are classified as long-term or short-term. Long-term capital gains are the profits an individual makes from selling assets, such as stock, a business, a house, or land, that were held for more than a year. Short-term capital gains are profits from the sale of assets held for less than a year.

Although this topic is not without paidcontroversy, the general idea is, if you are selling something you’ve owned for a long time, you can be taxed a lower rate.

All these rates have evolved over time based on economic and political factors,* so you can be confident they will change again in the future.

new In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), which made many changes to tax rates for the 2018 tax year. Long-term capital gains taxes did not change significantly.

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Federal Taxes

Definition Income tax is the money paid by individuals to federal, state, and, in some cases, local governments, and includes taxation of ordinary income and capital gains. Generally, U.S. citizens, residents, and some foreigners must file and pay federal income tax.

important In general, federal tax applies to many kinds of income. If you’re an employee at a startup, you need to consider four kinds of federal tax, each of which is computed differently.

confusion When it comes to equity compensation, it’s possible that you’ll have to worry about all of these, depending on your situation. That’s why we have a lot to cover here:

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Make sure your equity generates wealth, not a shocking tax bill.

Stock options, RSUs, job offers, and taxes—a detailed reference, including hundreds of resources, explained from the ground up, for employees and managers.

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Length: 80 pages
Edition: e2.1.0
Last Updated: 2021-02-19
Language: English
ISBN (Holloway.com):
978-1-952120-03-9

Equity Compensation

by Joshua LevyJoe Wallin
Stock options, RSUs, job offers, and taxes—a detailed reference, including hundreds of resources, explained from the ground up, for both employees and managers.

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