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How are stocks taxed?
So, you made yourself a pretty penny in the stock market last year. Congratulations! But before you spend your entire portfolio earnings, don’t forget that the government is always looking for its cut! Like all things which make you money, stocks are taxed. Like your regular income, you have to pay your taxes on your profitable stocks. How much you have to pay, however, is up to you.
What are stocks, anyway?
When a corporation becomes public, it allows portions of itself to be listed on the stock market. These portions are called shares of stock, and each represents ownership of the company. Each share you own entitles you to a portion of the company’s assets (what is owned) and profits (what is earned).
Stocks are considered the foundation of every investor’s portfolio. Historically, stocks are able to outperform other investments. It’s common for a stock to rise in price as time goes on.
For example, if you bought 5 shares of Apple at $10 in 2010, and sold them all for $30 in 2015, you would have made a $20 profit on each share.
The more stocks in a company which you own, the more that you have a claim to that company. If Apple issued 1,000 shares and you bought 100 shares, you would have a claim to 10% of the company’s assets and earnings.
Why do companies offer stocks?
Companies issue stocks to raise money. Stocks are entitlements to company assets and earnings, so companies sell these entitlements in an attempt to help their growth and expansion. Selling stocks allows companies to buy real estate, develop new products, reduce debt, grow staff, etc.
But you might be wondering how all of this affects you on tax day…
How stocks are taxed
In the end, stocks are taxed through Capital Gains Taxes. A capital gain occurs when you sell an asset for a higher price than what you originally paid to own it. It is that difference in profit which the Internal Revenue Service taxes.
Stocks are not the only assets subjected to capital gains taxes. In fact, all capital assets are subject to the tax. Examples include:
- Stocks
- Bonds
- Jewelry
- Homes
- Vehicles
- Collectibles
Non-capital assets are excluded from capital gains taxes. Examples of non-capital assets include copyright, artistic compositions, patents, drawings, recordings, etc.
If it is not immediately clear whether you have a capital asset or a non-capital asset, it is better to consult a tax professional before selling it. This way, the tax pro can explain how your property might be taxed, and by how much!
Long-Term vs Short Term Capital Gains Taxes on Stocks
Capital gains taxes vary depending on how long you hold a stock. For investments which you hold onto for at least a year, the tax rate is determined by your filing status and income bracket. It typically varies from 0-20% depending on the income bracket. These are considered “long term” capital gains taxes.
| Rate | Single | Married, Filing Jointly | Married, Filing Separately |
|---|---|---|---|
| 0% | Up to $40,400 | Up to $80,800 | Up to $40,400 |
| 15% | $40,401 - $445,850 | $80,801 - $501,600 | $40,401 - $250,800 |
| 20% | $445,851 and up | $501,601 and up | $250,801 and up |
If you hold onto a profitable stock for under a year- that is, you purchase and sell it within 365 days- your stocks are taxed as short-term capital gains. A short-term capital gains tax is far less favorable to the long-term tax due to tax liability. Your short-term tax is tied to your income. This means that the higher your annual income, the higher the tax rate on your capital gains.
The IRS has already created a guide for the different filing brackets and categories. For your convenience, we will list the tax rate for Married, Filing Jointly.
| Taxable Income | Tax Rate |
|---|---|
| $0 - $19,750 | 10% |
| $19,751 - $80,250 | $1,975 + 12% for the the income above $19,750 |
| $80,251 - $171,050 | $9,235 + 22% for the the income above $80,250 |
| $171,051 - $326,600 | $29,211 + 24% for the the income above $171,050 |
| $326,601 - $414,700 | $66,543 + 32% for the the income above $326,600 |
| $414,701 - $622,050 | $94,735 + 35% for the the income above $414,700 |
| $622,051+ | $167,307.50 + 37% for the the income above $622,050 |
How can you lower your stock’s capital gains taxes?
It is in the event that you wish to sell a stock that it is the most critical time to consult with a tax professional. This will always give you an edge on protecting your money and paying as little as possible to the government. A tax pro has access to knowledge which you may not have. For example, there are 9 states which tax less for capital gains:
- Arizona
- Arkansas
- Hawaii
- Montana
- New Mexico
- North Dakota
- South Carolina
- Vermont
- Wisconsin
A tax professional could show you how to maximize your tax savings through little loopholes like this. And it doesn’t end with stocks- a tax pro can illustrate how to minimize your capital gains on your cryptocurrency as well. In fact, we have an entire guide ready to walk you through our process!
In addition, capital gains taxes on your stocks can vary depending on the type of stock which you own. Dividend stocks in particular require a few more gymnastics to lower your tax rate, for example, but it is possible.
Our primary goal at Yoke Tax is to save you money. We want to help you avoid paying Uncle Sam as much money as possible, without risking your financial safety. Saving you money on capital gains taxes is only step one in that journey. Connect with us for free and let us handle the numbers.
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