How Will Selling My Stocks Affect My Taxes?
Selling stocks will likely affect your tax bill. Whether you earned a capital gain, a capital loss, or only earned dividends on your investments, you still may owe money this tax season.
If you work with a financial adviser, he or she should be able to briefly explain the tax information for you, but it is still your responsibility to have the correct paperwork on hand and to educate yourself on taxes owed. If you are using an online brokerage site, then you need to keep all receipts for stock sales and purchases. Remember, it’s always better to be prepared come tax season.
Below, what you need to know about how selling stocks can affect your tax bill.
Capital Gains Tax
When you sell your stocks, you are taxed on the profit you made. So, subtract what you originally bought the stock for from how much you sold it for. That is your capital gain. (Worth noting: Capital gains don’t just apply to stocks. You can also earn a capital gain on real estate, art, baseball cards, etc.)
If you earned a positive capital gain, then you will be responsible for paying taxes on that number. Here’s how that tax is calculated: If you owned the stock for less than a year before you sold it, it’s considered a short-term capital gain and you will be taxed on it as the same rate as your income. So, the tax rate on this depends on your income bracket and corresponding tax rate.
If you owned the stock for more than a year, it’s considered a long-term capital gain, and you are taxed at a lower rate, depending on your income bracket. The Tax Cuts and Jobs Act did not change the rules for taxes on long-term capital gains and qualified dividends. Those in the 10% and 15% pay 0%; those in the 25% to 35% pay 15%; and those in the 39.6% tax bracket pay 20% in capital gains taxes. Those in the 10% and 15% tax brackets pay 0% in long-term capital gains tax; those in the 25% to 35% tax brackets pay 15%; and those in the top 39.6% tax bracket pay 20%.
Also keep in mind that even if you didn’t sell any stocks this year, if you earned any interest or dividends on your stocks, bonds, mutual funds, or index funds, you will be responsible for paying taxes on those earnings.
Reporting a Capital Loss
If the number is negative, then you have a capital loss. You can claim a capital loss on your taxes to offset your taxable income for that year. You can also use capital losses to help offset any short-term capital gains you have for that year, then long-term capital gains. You can even carry them over to following years. However, be sure to consult an accountant about how to best claim capital losses, as it can be a very confusing process.
Sometimes, it’s wise to intentionally take a capital loss on an investment to help offset a large capital gain during that same year.
Waiting a Year to Sell Stock Lowers Your Tax Liability
If you are trying to lower the amount of taxes that you pay on your investments, it is best to wait a year before selling the stocks, since long-term capital gains are taxed at a lower rate. This could lower your tax liability while allowing you to profit from your stocks.
When you sell any stocks (especially if you do so at a profit), it is important to set aside the additional money you will need to cover your tax bill. You can simply set aside the amount determined by your tax rate. If it has been less than a year, then you will need to set aside the percentage that you are taxed based on your tax bracket. Also keep in mind that your tax bracket may go up based on your stock market earnings,
Keep Careful Records of Your Stock Purchases
It is always important to keep records of your purchases of stocks so that you can correctly claim them on your taxes. Keep a copy of the original purchase, as well as the sale price of each of your stocks. Your accountant can also help you determine how to file losses and gains.
Seek Professional Help
If you are concerned about your tax situation and how much you will owe this tax season, then you may want to consider hiring an accountant. An accountant can not only help you determine the best way to lower your tax bill, but can also help you figure out what your expected tax bill might be, so you can better plan financially.
Updated by Rachel Morgan Cautero.