If you have stocks, there may come a time in which you wish to sell some of them. But, what does selling stocks mean for your tax bill? Well, it depends on whether you gain money or lose money on the transaction.
When You Earn Money
Earning money on your stocks is a good thing! It’s why you bought the stocks in the first place. But, unfortunately, the money you earn will be taxed. More specifically, you’ll owe a capital gains tax. To determine your capital gain, subtract what you paid for the stocks from what you earned.
This is the amount you report as income and get taxed on. Note that the taxation amount will vary based on how long you’ve had the stocks in question. If you had them for more than a year, the taxation rate is the same as the taxation rate on your normal income. Or, if you owned the stock for longer than a calendar year, your tax rate will be based on the capital gains tax bracket you fall into.
When You Lose Money
Sadly, stocks can be unpredictable. And, sometimes, despite your best efforts, you may lose money on the sale of a stock. When that happens, you can use the loss to offset any gains you may have experienced. Just make sure you use the same kinds of losses with the same kinds of gains, short-term or long-term, when possible. You are actually required to do this first if you can. If you can’t, however, then you may use the loss to offset another type of gain.
You can also simply subtract the loss, up to $3000, from your regular income.
As you can see, just like with any investment,
tax rules do apply to stocks and to the money you earn or lose as a result of
them. To ensure you invest in the best possible stocks, that you sell at
opportune times, and that you manage both gains and losses as effectively as
possible, don’t underestimate the power and helpfulness of a knowledgeable tax
professional.