Investing in stocks is a common way to grow your wealth, but it’s important to be aware of the tax implications of your investment decisions. One of the most important taxes to understand is the capital gains tax, which is levied on profits from the sale of stocks and other capital assets. In this guide, we’ll explore how much stock gains are taxed, the different types of capital gains taxes, and strategies for minimizing your tax liability.
What is Capital Gains Tax?
Capital gains tax is a tax on the profit you make when you sell a capital asset, such as a stock, bond, or real estate. The tax is calculated by subtracting the cost or “basis” of the asset from the proceeds of the sale. The resulting gain is then taxed at a rate determined by your income and the length of time you held the asset.
Types of Capital Gains Taxes
There are two main types of capital gains taxes:
- Short-term capital gains tax: This tax applies to profits from the sale of assets held for one year or less. Short-term capital gains are taxed at the same rate as your ordinary income, which can range from 10% to 37%.
- Long-term capital gains tax: This tax applies to profits from the sale of assets held for more than one year. Long-term capital gains are taxed at a lower rate than short-term capital gains, with rates of 0%, 15%, or 20%, depending on your income.
Capital Gains Tax Rates
The capital gains tax rates for 2023 and 2024 are as follows:
| Filing Status | 0% Rate | 15% Rate | 20% Rate |
|---|---|---|---|
| Single | Up to $44,625 | $44,626 – $492,300 | Over $492,300 |
| 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 |
| Head of household | Up to $59,750 | $59,751 – $523,050 | Over $523,050 |
Strategies for Minimizing Capital Gains Tax
There are several strategies you can use to minimize your capital gains tax liability, including:
- Hold your investments for more than one year: Long-term capital gains are taxed at a lower rate than short-term capital gains, so holding your investments for more than a year can save you money on taxes.
- Use tax-advantaged accounts: Investing in tax-advantaged accounts, such as 401(k)s and IRAs, can help you defer or avoid capital gains taxes altogether.
- Sell losing investments: If you have any investments that have lost value, you can sell them to offset your capital gains. Capital losses can be used to reduce your taxable income by up to $3,000 per year.
- Harvest your gains: Harvesting your gains involves selling some of your investments that have appreciated in value to trigger capital gains. This can help you lock in your gains at a lower tax rate.
Capital gains tax is an important consideration for investors, but it’s also one that can be managed. By understanding the different types of capital gains taxes and the strategies for minimizing your tax liability, you can make informed investment decisions that help you maximize your returns.
Here’s how to pay 0% tax on capital gains
FAQ
How much tax do I pay on stock gains?
How much income tax on stock market gains?
Do I have to report stocks on taxes if I made less than $1000?
Do you pay capital gains tax if you sell a stock?
The profit you make when you sell your stock (and other similar assets, like real estate) is equal to your capital gain on the sale. The IRS taxes capital gains at the federal level and some states also tax capital gains at the state level. The tax rate you pay on your capital gains depends in part on how long you hold the asset before selling.
How are capital gains taxed?
The IRS taxes capital gains at the federal level and some states also tax capital gains at the state level. The tax rate you pay on your capital gains depends in part on how long you hold the asset before selling. Long-term capital gains are gains on assets you hold for more than one year. They’re taxed at lower rates than short-term capital gains.
How much tax do you pay if you hold a stock?
Had you held the stock for one year or less (making your capital gain a short-term one), your profit would have been taxed at your ordinary income tax rate, which can be as high as 37% for tax years 2022 and 2023. And that’s not counting any additional state taxes.
How much capital gains tax do I pay on sold assets?
However, you may only pay up to 20% for capital gains taxes. And unlike ordinary income taxes, your capital gain is generally determined by how long you hold an asset before you sell it. Use our capital gains calculator for the 2022-2023 tax season to determine how much tax you might pay on sold assets.