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Taxes on Stocks: What Will You Have to Pay?

Capital gains taxes are owed only after an asset, like stock, is sold

Buying and selling stocks involves paying capital gains taxes. How much you’ll owe depends on the amount of your earnings and how long you hold the stocks. While high-earners can pay as much as 37% on stocks they sell within a year of purchasing, lower-income investors may not pay any taxes on investment income. A financial advisor can help you manage your capital gains and optimize your investment portfolio for taxes. Let’s take a look at how much you could pay.

What Are Capital Gains?

Capital gains taxes are owed only after an asset, like stock, is sold

A capital gain is simply any profit earned when an investment is sold. To determine the capital gain generated by a sale, an investor would simply subtract the original purchase price of the asset from the sale price. For example, if an investor purchased $1,000 worth of stocks and eventually sold them for $5,000, their capital gain would be $4,000.

It’s vital to remember that capital gains taxes are owed only after an asset is sold and a profit is realized. If the investor in the example above held onto their stocks instead of selling, the profits would remain unrealized and no taxes would be owed.

There are two types of capital gains: short-term gains and long-term gains. A short-term capital gain is the profit made when an asset is sold after being held for less than a year. A long-term capital gain is the profit made when an asset is sold after being held for more than a year.

Also remember that capital gains aren’t just the profits generated when stocks are sold. A home sale can generate capital gains, as well as the sale of a business or vehicle.

How Short-Term Capital Gains Are Taxed

Short-term capital gains are taxed as ordinary income. As a result, how much an investor pays in short-term capital gains tax depends on their federal income tax bracket. Short-term capital can be taxed anywhere from 10% to 37% based on the investor’s income tax bracket.

For example, a single woman with an earned income of $75,000 makes a $5,000 profit from selling stock she purchased earlier in the year. This short-term capital gain would be taxed at same rate (22%) as her regular income. As a result, she would owe $1,100 to the IRS for the transaction.

2021 Short-Term Capital Gains Tax Rates

 RateSingleMarried Filing JointlyMarried Filing SeparatelyHead of Household
10%$0 – $9,950$0 – $19,900$0 – $9,950$0 – $14,200
12%$9,951 – $40,525$19,901 – $81,050$9,951 – $40,525$14,201 – $54,200
22%$40,526 – $86,375$81,051 – $172,750$40,526 – $86,375$54,201 – $86,350
24%$86,376 – $164,925$172,751 – $329,850$86,376 – $164,925$86,351 – $164,900
32%$164,926 – $209,425$329,851 – $418,850$164,926 – $209,425$164,901 – $209,400
35%$209,426 – $523,600$418,851 – $628,300$209,426 – $314,150$209,401 – $523,600

How Long-Term Capital Gains Are Taxed

Long-term capital gains are taxed more favorably than short-term gains. Profits made when stocks are sold more than a year after being purchased are taxed at 0%, 15% or 20%, depending on the investor’s tax bracket.

If the woman from the example above held onto her stock for longer than one year, her $5,000 profit would be considered a long-term capital gain. With an annual income of $75,000, the profit would be subject to a 15% tax.  As a result, the woman’s capital gains tax bill would drop to $750.

2021 Long-Term Capital Gains Tax Rates

 RateSingleMarried Filing JointlyMarried Filing SeparatelyHead of Household
0%$0 – $40,400$0  – $80,800$0 – $40,400$0 – $54,100
15%$40,400 – $445,850$80,800 – $501,600$40,400 – $250,800$54,100 – $473,750

Net Investment Income Tax

The net investment income tax is a 3.8% levy on certain high-income taxpayers.

Some investors may owe more than just capital gains taxes when they sell stocks. Since 2013, the investment earnings of some individuals, estates and trusts have been subject to the net investment income tax or NIIT.

This 3.8% levy applies to high-income taxpayers with income from capital gains, dividends, interest, non-qualified annuity distributions and rental properties. Individuals pay NIIT when their modified adjusted gross income (MAGI) surpasses the following thresholds imposed by the IRS:

Net Investment Income Tax (NIIT) Thresholds

Your Filing StatusThreshold Amount
Married Filing Jointly$250,000
Married Filing Separately$125,000
Head of Household (With Qualifying Person)$200,000
Qualifying Widow(er) With Dependent Child$250,000

It’s worth noting that only U.S. citizens and resident aliens with net investment income that exceeds the MAGI thresholds in the table above are required to pay the NIIT. Non-resident aliens are not subject to this tax, unless they elect to be treated as a resident so they can file jointly with their U.S. citizen or resident spouse.

Bottom Line

When an investor sells stock and makes a profit known as a capital gain, they’ll owe taxes on the money. How much they’ll be required to pay the IRS depends on their tax bracket and how long they owned the asset. While short-term capital gains are taxed as regular income, long-term capital gains receive more favorable treatment from the IRS and are taxed at either 0%, 15% or 20% depending on the person’s tax bracket. The net investment income tax is an additional 3.8% levy on high-income earners with certain investment income.

Tips for Managing Taxes

  • Don’t forget to consider your future tax bill when deciding whether to sell an investment. Holding an investment for at least a year will save you money at tax time. SmartAsset’s free Capital Gains Tax Calculator can help you estimate how much you may owe the IRS when you sell stock or other investments.
  • It can really pay to have a professional in your corner. A financial advisor can help you manage your investments and limit your tax liability. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Photo credit: © Manustrong, ©, © Burrell

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