When you sell a stock, there will be consequences for your tax bill. After selling the stock, any money you earned as a gain on the sale should land in your account after two business days following the execution of the sale order (known as the settlement date). Come tax season, you'll need to report that capital gain on your tax return.
You earn a capital gain when you sell a stock for more than you originally bought it for. If you sell a stock at a price that is lower, you net a capital loss, and you might be able to use that loss to reduce your taxable income for the year. You might also carry the loss forward to the next tax year to offset any capital gains you make then.
Here's what you need to know about selling stocks and taxes.
Key Takeaways
- When you sell a stock, the amount of tax you pay depends on a few factors: whether you earned a capital gain or loss, your taxable income, and how long you owned the stock.
- Capital gains will require you to pay tax on the money you made on your investment.
- Capital losses can help offset your tax bill.
- If you don't sell any stocks during the tax year, you won't have to pay taxes on those stocks—unless they pay dividends.
Selling a Stock and Earning a Capital Gain
Subtract the amount you paid for the shares from the amount you sold them for. The difference is your capital gain. For example, if you bought 10 shares of ABC Company's stock for $1,000, then sold them a year later for $1,500, you'd have earned a capital gain of $500.
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, although there may be limits for how and when you have to pay taxes on the capital gains depending on the asset.
Short- vs. Long-Term Capital Gains and Taxes
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, your short-term gain tax rate corresponds to your income tax rate for your bracket.
If you owned the stock for more than one year, you pay a long-term capital gains tax that's usually a lower rate than your income tax rate. In most cases, individuals pay a 15% capital gains tax, but there's also a 0% and 20% tax rate—it all depends on your taxable income.
Note
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.
Selling Stocks and Capital Losses
If you sold stocks for less than you paid to buy them, you have a capital loss. You can usecapital losses to help offset capital gains through what is known as tax-loss harvesting. 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 from 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 ($1,500 if married filing separately) 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.
Tip
It's usually not a good idea to offset long-term gains with short-term losses because those gains may be taxed at a lower rate. Talk to an investment or tax professional you trust about using the gains to offset income or carry them forward.
A Prohibited Wash Sale
The IRS will not allow you to buy the same or identical securities either 30 days before or 30 days after you sold them to harvest a capital tax loss. The IRS prohibits you from using that loss on your taxes because it considers the sale to have been a wash sale that you did 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.
If you are concerned about your tax situation and how much you will owethis tax season, consider hiring an accountant or working with a tax professional. An accountant not only can help you determine the best way to lower your tax bill, but they can help you figure out what your expected tax bill might be, so you can better plan financially.
Frequently Asked Questions (FAQs)
What happens when you sell a stock?
When you sell a stock, you're making the decision to no longer own it. You can sell one share or multiple shares of stocks that you own. When you sell the stock, you'll either receive a gain or a loss on your investment. The money from the sale of the stock, including your principal investment and any gains if you sold it for more, should be in your account and settled within two business days. You'll need to report sales of stock on your tax return.
When should you sell a stock?
Ideally, you would sell a stock when its share price is higher than what you bought it for, and when you're ready to use that investment money toward your financial goals. Exactly when to do that depends on your risk tolerance, the stock's performance, and your goals. If you're investing for the long term, you may not want to sell stocks for several years, until you need or want to use that money. If you're selling for the short term, you may decide to sell as soon as the share price rises a significant amount. It's completely up to you.
