A Simple Guide to Tax Types and How They Work

Key Takeaways

• Taxes are collected by federal, state, or local governments in order to fund public services and other government projects.

• There are three basic types of taxes: on earnings, purchases and property ownership.

• Investors will want to pay particular attention to earnings taxes, which include taxes on interest, dividends, capital gains, royalties and rental income.

Taxes are collected by federal, state, or local governments to fund public services and other government projects. Tax collection is a necessary part of the economic infrastructure, as it can help to provide services like healthcare, education and infrastructure. This article will explain the various tax types in order to provide an overview of when and why they are applied.

The Three Basic Tax Types

The three basic categories of taxes include: earned, bought and on ownership.

Earned: These taxes are collected on income earned from employment, investments, retirement benefits, or self-employment income like freelance or consulting work. Common taxes that fall under this category include Social Security/Medicare tax, which is often called FICA, or Federal Insurance Contributions Act, income tax that is collected at various federal, state and local levels, unemployment taxes, and more.

Buy Taxes: Buy taxes are associated with purchases and include sales tax, value-added tax (VAT), and excise taxes. Sales Tax is a state-level tax placed on goods or services purchased in a state or locality. Value-added tax (VAT) is a national-level tax on goods and services that is added at each stage of production, where the value added to the good or service is taxed. Excise taxes are levied on luxury items such as cigarettes, alcohol, gasoline, and other items.

Own Taxes: Own taxes are associated with property ownership. These include real estate taxes (property tax). This is a tax imposed on real estate by the local government and is based on the value of a property. Other taxes that fall under this category include inheritance tax which is a tax on the estate of a deceased person, and gift tax which is imposed when one gives away property or money.

Taxes on Earn Include:

• Personal Income taxes: This income tax is based on an individual’s wages and earnings. The taxation rate varies by jurisdiction, with some states having different brackets for different levels of income earners.
• Corporate Income Taxes: This is an income tax placed on any business entity that has its legal residence in a particular jurisdiction.
• Payroll taxes: Payroll taxes are imposed on employers to fund social security and other governmental programs. The tax consist of the employer’s contribution to social security and Medicare, as well as unemployment insurance.
• Capital gain taxes: This is a tax on the gains from investments, such as stock or real estate. Capital gains taxes are often taxed at lower rates than regular income.

Taxes for Buying Include:

• Sales Tax: This is a type of consumption tax imposed by the government on goods and services purchased within a jurisdiction. Sales tax is usually collected at the point of sale and can either be imposed on the customer or the retailer.
• Gross receipts tax: This tax is imposed on the seller of goods and services. It is based on the gross receipts from sales, meaning that it does not take into account any deductions for expenses or losses.
• Value-added Tax: This type of tax is imposed on goods and services at each stage of production, with the value added to the good or service being taxed. VAT is typically collected from customers, although it can also be passed onto suppliers if certain conditions are met.
• Excise Tax: Excise taxes are imposed on certain luxury items, such as cigarettes, alcohol, and gasoline. It is usually collected from the supplier.

Taxes for Owning Include:

• Property taxes: Property taxes are imposed on real estate by the local government. The taxation rate varies depending on the jurisdiction, with some states having different brackets for different levels of property owners. They are recurring in nature and are typically due once a year.
• Tangible Personal Property taxes (TPP): TPP is a tax on tangible property, such as furniture, appliances, and other items. It is usually collected from the owner of the property.
• Estate and Inheritance taxes: Estate tax is usually imposed on the value of the entire estate, while Inheritance taxes are imposed on individual heirs. It is imposed on the estate of a deceased person, and can also be applied to gifts given away by the deceased. Both estate and inheritance taxes are typically due within a certain period of time after death.
• Wealth taxes: This tax is imposed on the net worth of an individual or a business. It is usually collected from the owner of the property, although some countries impose wealth taxes on businesses as well.

What are the Tax Forms?

Tax forms are the documents used to report income and other information related to taxes. Depending on the type of taxes you are filing, you will need to use different forms. The most common tax forms include:

• 1040: This is the form used to report your income and other information related to filing taxes.
• W-4: This is the form used to determine an individual’s withholding amount for income taxes.
• 1040-ES: This is the form used to estimate your income tax amount and make payments.
• 941: This is the form used to report payroll taxes.
• SS-4: This is the form used to register your business for tax purposes.
• W-9: This is the form used to request a taxpayer identification number.
• W-2: This form is used to report wages and salaries you have earned in a particular year. Schedule.
• W-7: This form is used to apply for an Individual Taxpayer Identification Number (ITIN).
• 1099: This form is used to report any income earned from investments, such as interest, dividends, or capital gains.

Tax Brackets & Types

In the United States, taxes are generally divided into three categories: Progressive, Regressive, and Flat. Each type of tax has its own set of tax brackets, and each bracket is subject to different rates.

• Progressive Tax: A progressive tax system is when taxes increase as your income increases. This type of system is designed to be more equitable and redistribute wealth from the wealthy to the poorer members of society.
• Regressive Tax: A regressive tax is when taxes decrease as your income increases. This type of system tends to disproportionately favor the wealthy and is seen by many as unfair.
• Flat Tax: A flat tax system is when everyone pays the same rate of taxation regardless of their income. This type of system is seen as being fair because everyone pays the same rate, but it can be criticized for not taking into account ability to pay.

Different tax brackets have different tax rates, so it is important to understand the tax brackets when filing your taxes.

Tax brackets include:

• Marginal Tax Rate: This is the rate of tax paid on each additional dollar earned.
• Average Tax Rate: This is the average rate of tax paid on all income earned.
• Effective Tax Rate: This is the rate of tax paid on total income after deducting any exemptions or credits.

Taxes on Investments

Investments come with their own set of taxes, and understanding these taxes is important for investors. Investment income can include interest, dividends, capital gains, royalties, rental income, and more. Different types of investment income are taxed differently. First, let’s look at how public equity is taxed.

How is public equity taxed?

Publicly traded stocks are subject to capital gains taxes and dividend taxes. Capital gains tax is the tax paid on profits from the sale of a security, while dividend tax is the tax paid on income from any dividends or distributions that a stock pays out. Capital gains tax is categorized into long-term and short-term capital gains, which are taxed differently. Long-term capital gains tax rates are typically lower than short-term rates, giving investors an incentive to hold stocks for longer periods of time.

Long term vs short term capital gains tax

Short term capital gains taxes are the taxes paid on profits from a security that has been held for less than one year. These taxes are typically taxed at ordinary income rates, which can range from 10% to 37%. Long term capital gains taxes are the taxes paid on profits from selling a security that has been held for more than one year.

The rates for 2023 are as follows:

Filling Status	0% Rate	15% Rate	20% Rate
Single	Up to $44,625	$44,626 – $492,300	Over $492,300
Head of household	Up to $59,750	$59,751 – $523,050	Over $523,050
Married filing jointly	Up to $89,250	$89,251 – $553,850	Over $553,850
Married filing separately	Up to $44,625	$44,626 – $276,900	Over $276,900

2023 Short-term Capital Gains Tax rate:

Filling Status	10% Rate	12% Rate	22% Rate	24% Rate	32% Rate	35% Rate	37% Rate
Single	Up to $11,000	$11,000+ to $44,725	$44,725+ to $95,375	$95,375+ to $182,100	$182,100+ to $231,250	$231,250+ to $578,125	Over $578,125
Head of Household	Up to $15,700	$15,700+ to $59,850	$59,850+ to $95,350	$95,350+ to $182,100	$182,100+ to $231,250	$231,250+ to $578,100	Over $578,10
Married filing jointly	Up to $22,000	$22,000+ to $89,450	$89,450+ to $190,750	$190,750+ to $364,200	$364,200+ to $462,500	$462,500+ to $693,750	Over $693,750
Married filing separately	Up to $11,000	$11,000+ to $44,725	$44,725+ to $95,375	$95,375+ to $182,100	$182,100+ to $231,250	$231,250+ to $346,875	Over $346,875

How Are Alternative Investments Taxed?

Alternative investments, such as REITs, private equity, and real estate investments, are taxed differently than stocks. These types of investments can be subject to different types of taxes depending on the type of investment. For example, REITs are subject to both income and capital gains taxes while other alternative investments may only have a capital gains tax component.

Additionally, some alternative investments may also be subject to taxes from the state or local government. It is important to understand the different tax implications of alternative investments to ensure that you are taking full advantage of any tax benefits available.

Alternative Investments and Portfolio Diversification

Taxes on alternative investments are useful to understand because alternative investments can be valuable portfolio diversification tools. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that meant the potentially exceptional gains these investments presented were also limited to these groups.

To democratize these opportunities, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

Taxes are a part of everyday life, and understanding the different types of taxes is important for all investors. The three main types of taxes are own, buy, and earn. Each type has its own tax implications that need to be taken into account when filing your taxes. Stocks and alternative investments both have their own set of taxes that need to be understood, and failure to understand these taxes can lead to paying more tax than necessary.

This understanding is especially important when it comes to alternative investments, which are typically subject to different types of taxes. It also makes filing taxes easier, as a taxpayer can be able to complete self-assessments and get them correct. In addition, it helps to ensure compliance with local, state, and federal tax laws which can avoid any penalties or other issues.

All securities involve risk and may result in significant losses. Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.