Do I Pay Taxes on Stock I Don't Sell? (2024)

If you are new to investing, learning the ins and out of buying and selling stocks can be confusing enough.

But what’s even more confusing? Learning how taxes work when it comes to owning shares in a company.

The taxes you pay are dependent on what type of stocks you own, what type of returns you generate, and where you live.

Luckily for you though, the answer to a commonly asked question of “do I pay taxes on stock I don’t sell?” is quite straightforward and easy to understand.

Unless the stock you own pays a dividend, you don’t pay taxes on stock you don’t sell. If you own dividend paying stocks, unless they are held in a tax sheltered or deferred account, you will be required to pay taxes on the income earned from these dividends.

Stocks are no different, if you make a great investment and you own a stock that increases in value, then unless you sell that stock, don’t worry about having to pay any capital gains taxes.

Because remember, you haven’t actually profited off that stock yet, your gain is still on paper and not in your bank account.

Quick Note #1: If you own a stock that pays a dividend, you will be required to pay tax on your dividend income even if you don’t sell your stock – assuming you are investing through a taxable account and not a tax friendly account such as a TFSA, RRSP, IRA or 401k.

Taxes: Dividend vs. Non Dividend Paying Stocks

As mentioned above, you don’t have to pay capital gain taxes on any stocks that you don’t sell.

However, if you own a stock that pays a dividend, such as Apple, then you will be required to pay income tax on this dividend income.

But again, this is not capital gains tax, this is taxes that you pay based on additional taxable income you’ve generated from dividends.

Let’s Look at Two Examples

* Both examples assume investments were made in taxable accounts.

Dividend Paying Stock

Paddy buys $10,000 worth of stock in Company ABC in January of 2020.

Paddy bought 40 shares at $250 as he thought the company was undervalued and he loved the fact they paid $5 per share in dividends to investors in the previous year.

Throughout 2020, Company ABC saw tremendous growth and their price per share increased to $500 by January 1st of 2021 – this increased Paddy’s holdings (Market Value) in Company ABC to $20,000.

Additionally, despite huge growth, Company ABC paid the same dividends to their shareholders as they did in the previous year.

So as of January 1st 2021, Paddy has earned $200 ($5/share multiplied by 40 shares) in dividend income but also has $10,000 in unrealized capital gains as each share he owns is now worth $500.

After some thought, Paddy decides not to sell his 40 shares in Company ABC to see how they perform for another year.

Does Paddy owe any taxes for owning Company ABC for 2020?

Yes, Paddy will be required to pay taxes on the $200 dividend income he earned, but not on the $10,000 increase in market value as he decided not to sell his stock.

In other words, as Paddy chose not to sell, he doesn’t actually get that $10,000 so there is no taxable event.

So in this situation, Paddy didn’t sell his stock but he still had to pay taxes on his dividend income.

Poor Paddy.

Non-Dividend Paying Stock

I personally like to buy stocks that pay regular dividends, but this doesn’t always happen.

A lot of companies that are in a growth phase prefer to reinvest their profits back into the company as opposed to distributing them to shareholders.

For example, Facebook and Amazon, despite their massive success, don’t pay dividends to their shareholders. (Greedy right?!)

Okay, so let’s say in January of 2020 Paddy also buys 100 shares in Company 123 at a purchase price of $100/share. Paddy now owns $10,000 worth of stock in Company 123.

Unlike Company ABC, Company 123 doesn’t distribute dividends to their shareholders.

Over the next 5 years, Paddy holds all his shares while he watches Company 123 have tremendous growth as the share price rises to $500/share.

Paddy now owns $50,000 worth of stock. However, because Paddy has not sold any of his stock yet, his $40,000 capital gain is not taxable.

To put it another way, as there is no taxable event – dividends or realized capital gain – with Company 123, Paddy doesn’t have to pay any taxes on these shares despite increasing his holdings by $40,000.

To conclude, I have decided to recap this article with an FAQ section of everything listed above.

If you haven’t fully been able to grasp what I’ve explained above, don’t worry about it, I will recap it here quickly with short sentences and no math.

Do I Need to Pay Taxes on Stocks I Don’t Sell?

You don’t need to pay any capital gains tax on stocks that are still in your possession that haven’t been sold.

What if the Stock Pays a Dividend but I Don’t Sell it?

If you own a stock like Apple that pays a dividend, you will be required to pay taxes on those dividends even if you don’t sell the stock.

What if I Own Stocks That Don’t Pay Dividends?

Until you sell a non-dividend paying stock, there will be no taxable event associated with those stocks and therefore no taxes will need to be paid.

I hope you found the answer you were looking for in this article!

Thank you and goodnight!