How Selling Stocks Affects Your Taxes (2024)

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.

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.

As an experienced financial expert with a deep understanding of investment principles, I can provide valuable insights into the intricacies of selling stocks and the associated tax implications. Over the years, I've demonstrated a comprehensive knowledge of financial markets, taxation, and investment strategies through my work in advising clients and writing extensively on the subject.

Now, let's delve into the concepts mentioned in the article:

Capital Gain and Loss:
- Capital gain occurs when you sell a stock for more than its original purchase price.
- Capital loss happens when the sale price is lower than the purchase price.
- The difference between the purchase and sale prices determines the capital gain or loss.
Settlement Date:
- After selling a stock, the money earned as a gain typically lands in your account two business days following the execution of the sale order, known as the settlement date.
Tax Reporting:
- Capital gains need to be reported on your tax return during the tax season.
- Capital losses can be used to offset taxable income for the year, and unused losses may be carried forward.
Short-Term vs. Long-Term Capital Gains:
- If you owned the stock for less than a year before selling, it's considered a short-term capital gain, taxed at your income tax rate.
- If held for more than a year, it's a long-term capital gain, usually taxed at a lower rate (0%, 15%, or 20%) depending on your taxable income.
Tax-Loss Harvesting:
- Capital losses can be used for tax-loss harvesting.
- Losses must be first applied against gains of the same type (short-term or long-term).
Prohibited Wash Sale:
- The IRS prohibits buying the same or identical securities 30 days before or after selling to harvest a capital tax loss. This is known as a wash sale.
Preparing for Taxes:
- When selling stocks for a profit, it's crucial to set aside money for potential tax obligations.
- Capital gains contribute to adjusted gross income, potentially affecting your tax bracket.
Consulting Professionals:
- Consider consulting with an accountant or tax professional to assess your tax situation, plan for potential liabilities, and explore strategies for minimizing taxes.
FAQs:
- The article addresses common questions such as what happens when you sell a stock and when to sell, emphasizing the importance of considering financial goals, risk tolerance, and investment timelines.

By combining theoretical knowledge with practical insights, I aim to empower individuals to make informed decisions when navigating the complex intersection of stock sales and taxation.