Taxes on Stocks 101: What You Need to Know About Selling Stocks & Taxes

Investing in stocks gives you an opportunity for financial growth. If your stocks increase in value, you could potentially turn a profit.

While investing in stocks can be rewarding, there are taxes on stocks if you decide to sell them, and you’ll want to be prepared. So, how are stocks taxed? And what do you need to know as a new investor? We’ll break it down.

Before you invest in or sell stocks, learn more about selling stock and taxes.

When you sell stocks, do you have to pay taxes?

It’s a common question among beginner investors: Do you have to pay taxes on stocks?

If you sell stocks for a profit, you’ll generally need to pay taxes on the profit you earned. This is known as capital gains tax, and it’s used to tax any profit you make as an investor. There are different capital gains tax rates depending on your:

• Filing status
• Taxable income
• Length of your investment

What is capital gains tax?

Capital gains tax is used to tax capital gains — or profit an investor makes on an investment. Examples of capital gains include profit from real estate investments, stocks, and bonds. The difference between your initial investment and the eventual sale price is known as a capital gain or capital loss, depending on whether you profited.

Long-term vs. short-term capital gains

Taxes on stocks are determined by your tax bracket, your filing status, and whether you made short-term or long-term capital gains. As a general rule, assets are classified as long-term capital gains if you hold them for more than a year, while assets held for less than a year are classified as short-term capital gains.

There are exceptions to this rule, including:

• Property acquired by gift
• Property acquired from a descendent
• Patent property
• Commodity futures
• Applicable partnership interests

To determine how long you held an asset, start counting from the day after you acquired the asset until (and including) the day you sold it.

• Net long-term capital gain is your long-term capital gain subtracted by your long-term capital losses. 
• Net short-term capital gain is your short-term capital gain subtracted by your short-term capital losses. 
• Net capital gain is your net long-term capital gain for the year minus your net short-term capital loss for the year.

Capital gains tax rate

Understanding taxes on stocks is important — even if you can use a capital gains tax calculator.

The capital gains tax rate is based on your overall taxable income (including your net capital gain), but some capital gains may be taxed at 0%. In 2023, the tax rate on net capital gains is typically a maximum of 15% for individuals.

You’re eligible for a 0% capital gains tax rate if your taxable income is equal to or below:

• $44,625 for single and married filing separately
• $89,250 for married filing jointly and qualifying surviving spouse
• $59,750 for head of household

You must pay a capital gains rate of 15% if your taxable income meets the following criteria:

• > $44,625 but ≤ $492,300 for single
• > $44,625 but ≤ $276,900 for married filing separately
• > $89,250 but ≤ $553,850 for married filing jointly and qualifying surviving spouse
• > $59,750 but ≤ $523,050 for head of household

If you exceed these income brackets, your capital gains will be taxed at 20%. A higher capital gains tax rate may apply in some cases. For example:

• Section 1202 qualified small business stock is taxed at a maximum rate of 28%.
• Net capital gains from collectibles are taxed at a maximum of 28%.

Keep in mind that short-term and long-term capital gains are taxed differently. The capital gains tax rates above apply to long-term capital gains, but short-term capital gains are taxed using your income tax rate.

Do you have to pay capital gains taxes immediately?

While there’s no rule that says you have to pay capital gains taxes immediately, you should pay taxes on capital gains after you sell an asset.

If you don’t pay capital gains taxes when you sell an asset, they’re due when your taxes for that year are due. However, the IRS may require you to make quarterly estimated tax payments throughout the year. Quarterly estimated tax payments may be required if you owe more than $1,000 in taxes.

How are taxes on stocks calculated?

Capital gains taxes may seem complicated, but it’s a simple concept. If you sell an asset for more than the original purchase price, you made a profit — or capital gain. That capital gain is taxed based on the capital gains tax rate, which depends on a handful of factors.

Here’s how the IRS calculates capital gains on stock:

1. The first step is looking at the purchase price of the stock to determine how much you initially invested.
2. This purchase price is compared to the price at which you sold your stock to determine whether you made a profit.
3. The holding period (the duration of your investment) is also used to classify short-term and long-term capital gains.
4. Once the IRS calculates your net short-term or long-term capital gains, they use the capital gains tax rate to calculate your tax liability.

Keep in mind that the capital gains tax rate that applies to you is based on your taxable income and filing status.

How to minimize the taxes you pay on stocks

While capital gains are taxed at a standard rate, there are steps you can take to minimize the amount of taxes you owe. In this section, we’ll outline some common strategies, including tax-loss harvesting, holding long-term investments, and tax-advantaged accounts.

Tax-loss harvesting

Tax-loss harvesting is a strategy that allows you to decrease your tax liability by selling nonprofitable investments at a loss. You can essentially take a deduction for a bad investment to offset capital gains from stocks, reducing the amount of taxes you owe. Any remaining losses can offset up to $3,000 of income for single filers.

Choosing the right investments is a key aspect of tax-loss harvesting. Look for investments that don’t fit your current investment strategy or investments that you can easily replace with another investment in your portfolio.

Keep in mind that you must first use losses to offset the same types of gains. Before using long-term capital losses to offset short-term capital gains, you have to use them to offset long-term capital gains.

Holding investments 

While long-term capital gains are taxed at the capital gains tax rate, capital gains on assets held for a year or less are taxed at your income tax rate. This means that holding onto investments for at least a year is one of the best ways to minimize your capital gains tax liability.

When making an investment, it’s always best to hold it for at least a year so it’s classified as a long-term capital gain. Generally, when selling assets, people sell long-term investments before short-term investments.

Tax-advantaged accounts

Tax-advantaged accounts are accounts that provide tax benefits when you keep your money in them. For example, employees can contribute pre-tax income to a 401(k) to allow them to save money without paying taxes before investing. This allows your savings to grow at a faster rate.

You can use your capital gains to contribute to a tax-advantaged account to defer paying taxes. You’ll still have to pay taxes when you withdraw money from your retirement account at a later date, but you’ll have more contributions and potential for growth in the meantime.

Understanding dividends and their tax implications

Dividends are the payments you receive as a shareholder in a company. While qualified dividends can be reported to the IRS as capital gains and taxed at a lower rate, nonqualified dividends must be reported as income and taxed at your income tax rate.

So, how are stocks taxed if you’re receiving qualified dividends? With a few exceptions, the maximum tax on stocks is 20%, while the maximum income tax rate is 37%.

The difference between qualified and nonqualified dividends is the duration for which you hold your stocks. Stocks that are held for at least 61 days in a 120-day period that begins 60 days before the ex-dividend date are considered qualified dividends. You must purchase stock at least the day before the ex-dividend date to receive a dividend.

The impact of net investment income tax

Net investment income tax (NIIT) is what you’re required to pay if your modified adjusted gross income (MAGI) exceeds the thresholds provided by the IRS. These income thresholds are:

• Married filing jointly: $250,000
• Married filing separately: $125,000
• Single: $200,000
• Head of household (with qualifying person): $200,000
• Qualifying widow(er) with dependent child: $250,000

There are several strategies that can help you reduce your MAGI so you don’t have to pay NIIT.

Don’t worry about knowing these tax rules related to investing. No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed.