While the price of a stock can fluctuate wildly, you won’t pay any taxes on the gains until you sell the shares and convert your paper gains into actual gains. But, when you do sell the shares, the IRS will want a cut of your profits. Depending on how long you’ve owned the stock, you could qualify for a lower tax rate on your profits.
The tax rate applicable to profits on stock sales depends on how long you owned the shares and how much income you have.
Calculating Capital Gains on Stocks
To figure the taxes on stocks when you sell them, you need to know your basis and your net proceeds. Your basis is generally what you paid to purchase the stock, including any transaction fees. For example, if you purchased shares of stock for $995 and paid a $5 transaction fee, your basis for the stock would be $1,000. If you received the stock as a gift, your basis equals the donor’s basis. However, if you inherited the stock from a decedent, your basis equals the fair market value of the stock on the date the person died, regardless of what that person paid.
Your net proceeds equals the sales price minus any transaction costs. For example, if you sell the stock for $1,405, but paid a $5 transaction fee, your net proceeds would be $1,400. Once you know your basis and your net proceeds, subtract your basis from the net proceeds to determine your capital gain. In this case, subtracting your $1,000 basis from your $1,400 net proceeds yields a $400 taxable capital gain.
Different Rates for Different Gains
A different tax rate applies to your short-term capital gains rather than your long-term capital gains. Short-term capital gains, which are gains realized on stocks you owned for one year or less, are taxed at the same rate as your ordinary income. Long-term capital gains, which are gains from selling stocks you owned for more than one year, are taxed at the lower capital gains tax rates.
2018 Capital Gains Rates
The Tax Cuts and Jobs Act changed the tax brackets, but the long-term capital gains rates still range from zero percent to 20 percent. However, instead of the rates being based on your income tax bracket, the rates are based on dollar amounts. For example, for singles, the zero percent rate applies to capital gains income when your total income is no more than $38,600, the 15 percent rate applies to income between $38,601 and $425,800 and the 20 percent rate applies to income in excess of $425,801.
In order to offset potential capital gains taxes, you can also choose to sell various securities in your portfolio that are experiencing a loss, which will help reduce your overall capital gains profits. This practice is known as "tax loss harvesting" and is a common strategy among investors.
Capital Gains Tax Rate 2017
The 2017 capital gains rates also run from zero percent to 20 percent, but the applicable capital gains rate depends on the ordinary tax rate that would have applied if the income had been ordinary income. If the income would have been taxed at a rate below 25 percent, the capital gains tax rate is zero percent. If the income would have been taxed at 25 percent or higher, except for the 39.6 percent bracket, the rate is 15 percent. Finally, if the income would have fallen in the top 39.6 percent tax bracket, the rate is 20 percent.
- Legal Information Institute: 26 USC 1
- IRS: Topic Number 409 - Capital Gains and Losses
- IRS: Publication 550
- Betterment: Experience the Next Generation of Tax Loss Harvesting
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- Internal Revenue Service. "Publication 544 (2018): Sales and Other Dispositions of Assets," Page 20. Accessed Feb. 25, 2020.
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