Are you unsure how to pay taxes on stocks? We guide you through the laws and share how to get the most of your investment.
Like almost any other form of income, stocks are subject to taxation—specifically, capital gains tax. If you’re wondering, “how do you pay taxes on stocks?” you’re not alone. Fortunately, help is available.
Today, we're taking a closer look at how to pay taxes on stocks, plus tips to maximize your investments.
How do taxes work on stocks? Although it might seem complicated, it's fairly straightforward. Profits from stocks are considered capital assets, in the same category as your home and personal items. When you make a profit off such an asset, you’re earning capital gain.
Your tax rate will be either short-term or long-term, depending on how long you’ve held your stocks.
If the period is less than one year, then you’ll be subject to your usual tax rates. The long-term tax rates shouldn’t exceed 15 percent, with income-based exceptions.
If you’re below a certain income threshold for your status, your long-term rate could be zero percent, whereas high-income earners could get taxed at rates of 20 percent or higher. Rates usually change every year, so be sure to keep up-to-date.
You’ll still have to pay taxes on them, but on the original owner’s basis on the date of transfer. Topic No. 703 on the IRS website explains the details.
You can use a stock tax calculator to get an estimate. Take into account that these tools can’t factor in all your unique variables, though. You'll need to consider:
You'll need to determine each of those factors before you can accurately estimate what you owe. Some of the more complex issues are covered below.
As a taxpayer and a stockholder, it’s important to be aware of the regulations dictating the fees you’ll owe come tax season. You’ll need to pay taxes on stocks, but you can lower the bill with these tips:
The dividends you’re earning are either qualified or nonqualified. Figuring out which category you fall into could help you reduce the taxes you owe.
Nonqualified dividends mean that your holdings will get taxed at ordinary rates. However, if your dividends are qualified, you could be subject to highly favorable capital gains rates.
Qualified stocks are those owned for more than 60 days and held by a qualified corporation (foreign or national). The exact rate will range from zero percent to 20 percent, depending on your income and other factors.
IRS Publication 550 is a useful resource to learn more about dividends. Certain circumstances can allow you to pay a lower tax rate.
You could be eligible for deductibles to decrease your tax fees. For example, you might be able to deduct the fees paid to your stockbroker.
You should also be aware of your capital losses. After all, why pay tax if you lost money on stocks rather than gained?
For instance, say you purchased a stock at $6,000 and sold another one for a loss of $2,000. Your capital gains are $4,000, which is what you’ll get taxed on.
If your capital gains losses exceed your gains—say, your losses total $6,000, and your profits total $2,000—you’re eligible to deduct up to $3,000 in losses per year. If you’re married and filing separately, the cap is half of that: $1,500.
However, there’s a caveat to this regulation. To avoid investors selling stocks at a loss to offset gains, only to repurchase them later, the IRS stipulates a timeframe for claiming a stock as a capital loss. You have to wait at least 30 days before rebuying it; otherwise, it won’t count.
A common question stockholders ask is, “When do you pay taxes on stocks?” You’re required to pay taxes after you sell and realize gains—but you might want to hold off.
The IRS usually favors long-term investors: a principle that applies to almost all tax law fields. Cashing your stocks to invest in fresh opportunities is understandable, but consider the big picture.
Let’s say you’re married, filing jointly, and have an income over $171,050, but below $326,600. Your tax rate will be 24 percent, but it would be 15 percent at the long-term capital gains rate.
Now, holding assets might not align with your investment strategy—but it's an IRS rule you'll still want to keep in mind.
Where you choose to keep your stocks can dramatically impact how much tax you’re obliged to pay on them.
If your dividends and capital gains are in either a traditional IRA account or a Roth IRA, you’re eligible for tax deferment.
Standard regulations apply, meaning you won’t be able to withdraw money from your traditional IRA without paying taxes. You can only deposit post-tax income for a Roth IRA, which means it’s a better pick if your retirement income will exceed your working income.
There are varying methods of calculating your cost basis if you acquire shares at different prices and times. If you have a holding of significant value to sell, you might want to consult with a professional tax advisor to determine which cost basis method will be most advantageous.
Remember to incorporate taxes into your investment strategy. Hold onto your investments for longer to reduce your capital tax obligations, and calculate capital losses to avoid unnecessary payments.
If you have any questions about paying taxes on stocks or want any additional information, contact the experienced tax professionals at your local ATAX office. We're ready to help with all issues related to stocks and taxes, including personal taxes, bookkeeping, payroll, business taxes, and incorporations.
You don't have to hand over all of your stock earnings to the IRS. Contact an ATAX tax professional today to explore your options!