When you buy or sell stocks, you must pay capital gains taxes. The amount you’ll owe is determined by the number of your earnings and how long you’ve held onto the stocks. One of the best ways to minimize your stock tax bills is to hold onto your stocks for a longer period of time.
What’s A Capital Gain?
A capital gain essentially is any profit earned when an investment is sold. An investor can calculate the capital gain earned by a sale by subtracting the asset’s original purchase price from the sale price. For example, if an investor bought $1,000 worth of stocks and sold them for $5,000, their capital gain would be $4,000.
Depending on how long the investor holds onto the stocks will result in how much tax percentage they pay. Their income is also an important factor to take note of as well. When you sell an investment for less than the initial purchase price, a capital loss occurs. Capital losses can be used to offset capital gains on tax returns.
Short-Term Capital Gain
Short-term Capital Gain is taxed as ordinary income. As a result, the amount of short-term capital gains tax paid by an investor is determined by their federal income tax bracket. Depending on the investor’s income tax bracket, the short-term capital may be taxed from anywhere from 10% to 37%.
For example, a single woman with a $75,000 annual income makes a $5,000 profit by selling stocks she bought earlier in the year. Her short-term capital gain would be taxed at the same rate as her normal income (22%). As a result, the single woman would need to owe the IRS $1,100.
Long-Term Capital Gain
Long-term capital gains are taxed less than short-term capital gains because any stock profits that are made when stocks are sold more than a year after being purchased are taxed at the rate of 0%, 15%, or 20%, depending on the investor’s tax bracket.
For example, if the woman from the earlier example kept her stock for more than a year, her $5,000 profit would be classified as a long-term capital gain. With an annual income of $75,000, the profit would be subject to 15% tax resulting in the capital gains tax bill dropping to $750.
Resolve Your Tax Bills
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