Uncle Sam always wants his share of the pie and buying or selling stocks is no exception. Most income you bring in results in some type of tax liability. Just how much will you owe and when?
We help you understand the ins and outs of taxes on buying and selling stocks below.
The Good News – Buying Stocks Doesn’t Incur a Tax Liability
Buying stock doesn’t automatically result in a profit. You don’t owe taxes just because you purchased a stock, just like you wouldn’t owe taxes if you bought a piece of valuable art. However, you do need to keep track of the transaction as you’ll need the ‘buy price’ when you sell the stock, which most people do at least at some point.
It’s when you sell stocks that you incur tax liabilities.
The Bad News – Selling Stocks May Incur a Tax Liability
Notice we said ‘may’ incur a tax liability. It’s not a definite thing. It depends on how the stock performs and how much you earn or how much your ‘capital gains’ are.
- Short-term gains – Any stock you owned for 12 months or less that you sell for more than you bought it for is a short-term gain. You’ll pay your ‘normal’ tax rate on these earnings. In other words, whatever tax rate you pay on your regular income, you’ll also owe on your capital gains.
- Long-term gains – Any stock you owned for more than 12 months that you sell for more than you bought it for is a long-term gain. Most investors pay lower tax rates on long-term gains. The exact percentage depends on your income by ranges from 0% – 20%.
If you lost money, or sold the stock for less than you paid, it’s a ‘capital loss.’ As you probably guessed, you don’t pay taxes on capital losses. But, you do get to deduct the loss from your gains to lower your tax liability. If you don’t have any gains, you can use the loss to reduce your taxable income by as much as $3,000. If you can’t use the capital loss this year, you can carry it forward to future years.
Don’t Forget Dividends
Sometimes you owe taxes on your stocks even if you don’t sell them. Dividend earning stocks bring in income. Companies often pay dividends quarterly or annually. You must claim the income on your tax returns and pay appropriate taxes.
The amount of taxes earned depends on how long you owned the stock. If it’s a qualified dividend stock, you owned it for at least 60 days during the 121 days before the dividend payout. Qualified dividend stocks pay long-term gains tax rates while unqualified dividend stock payments pay short-term (or your standard tax rate).
Discuss your tax on buying and selling stocks with your tax advisor before making an investment decision. The taxes can eat into your profits and make you choose other ways to invest if your tax liability is too high.