This question was sent in by HSA Edge reader Marc. Feel free to send in your own question.
What is the tax consequence for holding an investment through an HSA brokerage account for a short term? Iknow that HSAs are tax free if you obey the rules of the HSA, so I’m assuming there’s nothing limiting the length of time held in an investment?
Tax Free Growth
You are correct that there is nothing that limits or penalizes investment length in the HSA. As part of the HSA’s triple tax advantage, investments grow tax free. This means that capital gains, either short or long term, are not assessed on any growth in the HSA. Per IRS Form 969:
The interest or other earnings on the assets in the account are tax free
In a non-tax advantaged (regular “brokerage”) account, a tax liability is created when earnings occur from buying and selling a financial instrument. The rate of those capital gains is determined by how long the investment is held. That amount must be aggregated at tax time and paid, with any losses offsetting taxes on gains. This is not the case with an HSA, and this is a benefit to the user in terms of:
- long term growth
- tax savings
- reduced paperwork
Thus, the HSA can be used as a “trading vehicle” without penalty, although the risk of that strategy is up to the account holder to decide.
FYI Fidelity recently started offering HSA’s with no fees and very good investment options.
Note: If you want help filing your HSA tax forms, please consider my service EasyForm8889.com. It asks you simple questions and fills out Form 8889 correctly for you in about 10 minutes.