How Selling Stocks Affects Your Taxes
Selling stocks will have consequences for your tax bill. If you netted a capital gain—because your stock transaction or transactions resulted in your making a profit—you will owe capital gains tax. If you netted a capital loss, you might be able to use the loss to reduce your income for the year. You might also carry the loss forward to the next tax year to offset any capital gain you may make then.
What Is a Capital Gain?
Subtract the amount you paid for the shares from the amount you sold them for. The difference is your capital gain.
Capital gains don’t just apply to stocks. You can earn a capital gain on pretty much any asset you sell for more than you paid for it. However, in many cases, you won't have to pay capital gains tax on a profit from a home sale.
Short-Term vs. Long-Term Capital Gains
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 at the same rate as your income. So the short-term gain tax rate corresponds to your income tax rate for your bracket.
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 than your income. Starting with the 2018 tax year, capital gains have their own tax brackets. For 2020, single taxpayers pay 0% on long-term capital gains if their taxable income is below $40,000, 15% on long-term capital gains if their taxable income is between $40,000 and $441,450, and 20% if their taxable income is greater than $441,450. Different ranges apply for married individuals filing joint returns and people filing as Head of Household.
If you didn't sell any stocks in the current tax year, you won't pay capital gains tax but you may still have to pay tax on dividend income from stocks you own.
A Capital Loss
If you sold stocks for less than you paid to buy them, you have a capital loss. You can use capital losses to help offset capital gains. You must first use them against the same type of gain: So if you had a short-term capital loss, you must first use it against a short-term capital gain. Then you may use it against a long-term capital gain.
You can also claim a capital loss on your taxes to subtract as much as $3,000 off your ordinary taxable income for that year. Any unused losses can be carried forward to offset capital gains in future years, or used to offset up to $3,000 of ordinary income in subsequent years.
Sometimes, it’s wise to intentionally take a capital loss on an investment to help offset a large capital gain during that same year. This strategy is known as tax-loss harvesting.
It's usually not a good idea to offset long-term gains with short-term losses because those gains are taxed at a lower rate. You would probably be better off using the gains to offset income or carrying them forward.
A Prohibited Wash Sale
The Internal Revenue Service will not allow you to buy the same or, for all intents and purposes, identical securities either 30 days before or 30 days after you sold them to harvest a capital tax loss. The IRS will prohibit you from using that loss on your taxes because it considers the sale to have been a wash sale that was done only to save on your taxes.
Preparing for Your Tax Bill
When you sell stocks for a profit, it is important to set aside the money you will need to cover your tax bill. Keep in mind that your tax bracket may go up because of your stock market profits: Capital gains are included in your adjusted gross income for tax purposes.
Seeking an Accountant's Help
If you are concerned about your tax situation and how much you will owe this tax season, you may want to consider hiring an accountant. An accountant can not only help you determine the best way to lower your tax bill; they can also help you figure out what your expected tax bill might be, so you can better plan financially.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
Merrill. "Calculating Taxes on Stock Sales." Accessed Oct. 14, 2020.
Tax Foundation. "2020 Tax Brackets." Accessed Oct. 14, 2020.
IRS. "Topic No. 409 Capital Gains and Losses." Accessed Oct. 14, 2020.
Vanguard. "Offsetting Gains Through Tax-Loss Harvesting." Accessed Oct. 14, 2020.
Securities and Exchange Commission. "Fast Answers: Wash Sales." Accessed Oct. 14, 2020.
FINRA. "Capital Gains Explained." Accessed Oct. 14, 2020.