Investing in stocks can be a lucrative way to grow your wealth, but it’s essential to be aware of the tax implications associated with selling stocks for a profit. This comprehensive guide will delve into the intricacies of capital gains tax, providing a clear understanding of when and how you need to declare income from shares.
What is Capital Gains Tax?
Capital gains tax is a levy imposed on the profit you make when you sell an asset, such as stocks, for more than you paid for it. The tax rate you pay depends on how long you held the asset before selling it.
Short-Term Capital Gains Tax
If you sell a stock within a year of purchasing it, the profit you make is subject to short-term capital gains tax. This tax rate is the same as your ordinary income tax bracket, which can range from 10% to 37%.
Long-Term Capital Gains Tax
If you hold a stock for more than a year before selling it, the profit you make is subject to long-term capital gains tax. The rates for long-term capital gains are more favorable than those for short-term capital gains, ranging from 0% to 20%.
Qualifying for Long-Term Capital Gains Tax Rates
To qualify for the lower long-term capital gains tax rates, you must meet the following criteria:
- You must have held the stock for more than a year.
- Your taxable income must fall within certain thresholds. For 2023, the thresholds are:
- 0% rate: Up to $41,675 for single filers and $83,350 for married couples filing jointly
- 15% rate: $41,675 to $459,750 for single filers and $83,350 to $539,900 for married couples filing jointly
- 20% rate: Over $459,750 for single filers and $539,900 for married couples filing jointly
Calculating Capital Gains Tax
To calculate your capital gains tax, you need to determine your cost basis and your capital gain.
- Cost basis: This is the original purchase price of the stock, plus any additional costs associated with acquiring it, such as brokerage fees.
- Capital gain: This is the difference between your cost basis and the sale price of the stock.
Once you have calculated your capital gain, you can apply the appropriate tax rate based on your holding period and taxable income.
Exemptions and Deferrals
There are certain situations where you may be exempt from paying capital gains tax or defer paying it until a later date. These include:
- Selling stock at a loss: If you sell a stock for less than you paid for it, you can claim a capital loss on your tax return.
- Using a tax-advantaged account: If you hold stocks in a tax-advantaged account, such as a 401(k) or IRA, you can defer paying capital gains tax until you withdraw the money from the account.
- Qualifying for the Section 1202 exclusion: If you meet certain criteria, you may be eligible to exclude up to $10 million of capital gains from the sale of qualified small business stock.
Understanding capital gains tax is crucial for investors who want to maximize their returns and minimize their tax liability. By following the guidelines outlined in this guide, you can ensure that you are declaring income from shares accurately and taking advantage of any exemptions or deferrals that may be available to you. Remember to consult with a tax professional if you have any specific questions or need personalized advice.
Taxes on Stocks Explained for Beginners that Know NOTHING About Taxes
FAQ
Do shares count as taxable income?
Do stock shares count as income?
Do I have to report stock income?
Do I have to report stocks on taxes if I made less than $500?
Do you pay capital gains tax if you sell stock?
If you sold stock that you owned for at least a year, you’ll benefit from the lower long-term capital gains tax rate. In 2021, a married couple filing jointly with taxable income of up to $80,800 pays nothing in long-term capital gains. Those with incomes from $80,801 to $501,600 pay 15%. And those with higher incomes pay 20%.
Do I have taxable income if I sell a stock?
You have taxable income or deductible loss when you sell the stock you received by exercising the option. You generally treat this amount as a capital gain or loss. For specific information and reporting requirements, refer to Publication 525.
Are dividends taxable income?
Depending on a person’s taxable income and filing status the tax gain percentages can be 0 percent, 15 percent, or 20 percent. Dividends from stocks are considered taxable income as well. In dividends, there are qualified and non-qualified. Non-qualified dividends are subject to the same tax rate as their normal income tax bracket rate.
How much tax do you pay if you sell a stock?
Generally, any profit you make on the sale of an asset is taxable at either 0%, 15% or 20% if you held the shares for more than a year, or at your ordinary tax rate if you held the shares for a year or less. Any dividends you receive from a stock are also usually taxable. Do you pay taxes on stocks you don’t sell? No.