Financial experts agree that to achieve the best return from investments in stocks, you should hang onto your shares for the long term. If, however, you’ve decided that it’s time to sell any stock you own, then you’ll need to understand the tax implications so you know just how much of your gains are yours to keep and how much goes to Uncle Sam. You may incur tax penalties for cashing out stock that you have held less than a year as part of short-term capital gains taxation.
Depending upon the length of time you have held your stock, you may be required to pay taxes that closely match your current income tax rates.
Finding More Information About Capital Gains Tax
Earnings from stocks that you’ve had for less than a year are taxed at a higher rate than those you’ve held for longer, even though both stocks are subject to capital gains tax at sale. For stocks owned less than a year, the capital gains tax penalty is equal to your normal tax rate, which is dependent on how much you earn, and thus what tax bracket you fall under.I
If you’ve owned the stocks you’re now planning to sell for a long time, you won’t feel Uncle Sam’s pinch quite so badly. That’s because taxes on stock gains from long-term investments, or those held for more than a year, will either be 15 or 20 percent depending on your income level. And only the gains are taxed, not your original cash investment.
Looking For Your Tax Penalty
To find out just how much you’ll owe in taxes for the sale of a stock, the first thing you need to do is figure out how much you gained, if anything, from the investment. This is the difference between the stock’s selling price (minus the cost of executing the sale) and the price for which you purchased the stock (plus any fees that resulted from the purchase). Once you know what your gains are, you can figure out the percentage of your tax liability and simply deduct that from your gains. You can use a stock gain calculator to ensure that your data is accurate.
Tax penalties for the sale of employer stock and tax-deferred accounts are a bit different. For employer stock, selling your shares will affect your total income, and thus how much you must pay Uncle Sam at tax time just like any other income. The reason for that is that the company stock is considered part of your overall compensation plan. For tax-deferred accounts such as 401ks, selling doesn’t trigger any tax penalties, because you pay taxes on your gains only when you start withdrawing from your plan at retirement.
Obtaining More Savings
Making the most of your investment money has to do not just with investing wisely, but also with incurring the least cost for your investment activity. One way to do that is to limit how much you are taxed. You can do so by delaying the sale of stock, since you’ll pay more in stock income tax for investments sold within a year of purchase than for those you keep for longer than a year. Other ways are by selling your stocks through a retirement account such as a 401k or IRA. Finally, you can offset capital gains tax liability by any capital losses from investments.
Reporting Your Capital Gains
You can use Schedule D of IRS Form 1040 to report all capital gains related information to the IRS for tax purposes. Failure to do so could result in stiff penalties.
Cynthia Gomez has been writing and editing professionally for more than a decade. She is currently an editor at a major publishing company, where she works on various trade journals. Gomez also spent many years working as a newspaper reporter. She holds a bachelor's degree in journalism from Northeastern University.