Capital gains rate is, of course, lower, especially when long-term assets are involved. This promotes a buy-and-hold investment strategy.
Even the dividends you receive are taxed at either favorable rates (for qualified dividends) or ordinary rates (for nonqualified dividends). Here's a smart strategy: keep your stocks in your portfolio long enough so you qualify for the lower tax rates on dividends.
Finally, interest income is taxed at ordinary income rates, which are typically higher than those on dividends and capital gains. In this respect, like the latter, investors might be advised to hold minimal investments in assets generating interest if tax avoidance is a primary goal.
The majority of investors use tax-deferred accounts, such as an IRA or 401(k), with the hopes of minimizing these taxes because gains, dividends, and interest aren't taxed until money is withdrawn. Tax-loss harvesting- selling losing investments to offset taxable gains-is also useful in reducing the tax on capital gains.