Investors usually need to pay taxes on their stocks when and if they sell them, assuming they’ve accrued a capital gain (or profit) from the sale. But there are other circumstances when stock holdings may generate a tax liability for an investor, too. This is important for investors to understand so that they can plan for the tax implications of their investment strategy. Knowing how your investments could impact your taxes may better prepare you for tax season and allow you to make more informed investment decisions.
First, an important note: The following should not be considered tax advice. Below, you’ll learn about some tax guidelines, but to fully understand the implications, it’s wise to consult a tax professional.
Do You Have to Pay Taxes on Stocks?
Do you need to pay taxes on stocks? It depends. Typically, as mentioned, investors would need to pay capital gains taxes when they sell a stock – the sale of which triggers a taxable event. But broadly speaking, yes, investors need to pay taxes on their stock holdings. The main question and what investors need to figure out, is when do you need to pay taxes on stocks, and what other actions or incidences, besides a sale, could trigger a taxable event.
When Do You Pay Taxes on Stocks?
There are several scenarios in which you may owe taxes related to the stocks you hold in an investment account. The most well known is the tax liability incurred when you sell a stock that has appreciated in value since you purchased it. The difference in value is referred to as a capital gain. When you have capital gains, you must pay taxes on those earnings.
Capital gains even have their own special tax levels and rules. To get a sense of what you might owe after selling a stock, you’d need to check the capital gains tax rate – more on that below.
You will only owe capital gains taxes if your investments are sold for more than you paid for them (you turn a profit from the sale). That’s important to consider – especially if you’re trying to get a sense of taxes and ROI on your investments, with taxes taken into account.
There are two types of capital gains tax:
Short-term Capital Gains
Short-term capital gains tax applies when you sell an asset that you owned for less than one year, and that gained in value within that time frame. These gains would be taxed at the same rate as your typical tax bracket, so they’re important for day traders to consider.
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Short-Term Capital Gains Rates for Tax Years 2022 – 2023 |
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|---|---|---|---|---|
| Single Taxable Income | Married Couple Filing Jointly Taxable Income | |||
| 2022 | 2023 | 2022 | 2023 | |
| 10% | $0 – $10,275 | $0 – $11,000 | $0 – $20,550 | $0 – $22,000 |
| 12% | $10,276 – $41,775 | $11,001 – $44,725 | $20,551 – $83,550 | $22,001 – $89,450 |
| 22% | $41,776 – $89,075 | $44,726 – $95,375 | $83,551 – $178,150 | $89,451 – $190,750 |
| 24% | $89,076 – $170,050 | $95,376 – $182,100 | $178,151 – $340,100 | $190,751 – $364,200 |
| 32% | $170,052 – $215,950 | $182,101 – $231,250 | $340,101 – $431,900 | $364,201 – $462,500 |
| 35% | $215,951 – $539,900 | $231,251 – $578,125 | $431,901 – $647,850 | $462,501 – $693,750 |
| 37% | $539,901 or higher | $578,126 or higher | $647,851 or higher | $693,751 or higher |
Long-term Capital Gains
Long-term capital gains tax applies when you sell an asset that gained in value after holding it for more than a year. Depending on your taxable income and tax filing status, you’d be taxed at one of these three rates: 0%, 15%, or 20%. Overall, long-term capital gains tax rates are typically lower than those on short-term capital gains.
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Long-Term Capital Gains Rates for Tax Years 2022 – 2023 |
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|---|---|---|---|---|
| Single Taxable Income | Married Couple Filing Jointly Taxable Income | |||
| 2022 | 2023 | 2022 | 2023 | |
| 0% | $0 – $41,675 | $0 – $44,625 | $0 – $83,350 | $0 – $89,250 |
| 15% | $41,676 – $459,750 | $44,626 – $492,300 | $83,351 – $517,200 | $89,251 – $553,850 |
| 20% | $459,751 or higher | $492,301 or higher | $517,201 or higher | $553,851 or higher |
Capital Losses
If you sell a stock for less than you purchased it, the difference is called a capital loss. You can deduct your capital losses from your capital gains each year, and offset the amount in taxes you owe on your capital gains.
You can also apply up to $3,000 in investment losses to offset regular income taxes.
Tax-loss Harvesting
The process mentioned above – which involves deducting capital losses from your capital gains to secure tax savings – is called tax-loss harvesting. It’s a common technique often used near the end of the calendar year to try and minimize an investor’s tax liability.
Tax-loss harvesting is also commonly used as a part of a tax-efficient investing strategy. It may be worth speaking with a financial professional to get a better idea of whether it’s a good strategy for your specific situation.
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Taxes on Investment Income
You may have taxes related to your stock investments even when you don’t sell them. This holds true in the event that the investments generate income.
Dividends
You may receive periodic dividends from some of your stocks when the company you’ve invested in earns a profit. If the dividends you earn add up to a large amount, you may be required to pay taxes on those earnings. Each year, you will receive a 1099-DIV tax form for each stock or investment from which you received dividends. These forms will help you determine how much in taxes you owe.
There are two broad categories of dividends: qualified or nonqualified/ordinary. The IRS taxes non-qualified dividends at your regular income tax bracket. The rate on qualified dividends may be 0%, 15%, or 20%, depending on your filing status and taxable income. This rate is usually less than the one for nonqualified dividends, though those with a higher income typically pay a higher tax rate on dividends.
Interest Income
This money can come from brokerage account interest or from bond/mutual fund interest, as two examples, and it is taxed at your ordinary income level. Municipal bonds are an exception because they’re exempt from federal taxes and, if issued from your state, may be exempt from state taxes, as well.
Net Investment Income Tax (NIIT)
Also called the Medicare tax, this is a flat rate investment income tax of 3.8% for taxpayers whose adjusted gross income exceeds $200,000 for single filers or $250,000 for filers filing jointly. Taxpayers who qualify may owe interest on the following types of investment income, among others: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from businesses involved in trading of financial instruments or commodities.
Recommended: Investment Tax Rules Every Investor Should Know
When Do I Not Have to Pay Taxes on Stocks?
Again, this should first and foremost be a discussion you have with your tax professional. But there are a few situations you should know about where you often don’t pay taxes when selling a stock. For example, if you are investing through a tax-deferred retirement investment account like an IRA or a 401(k), you won’t have to pay taxes on any gains when you buy and sell stocks inside the account. However, if you were to sell stock in one of these accounts and then withdraw it, you could owe taxes on the withdrawal.
4 Strategies To Pay Lower Taxes on Stocks
If the answer to “Do you have to pay taxes on stocks?” is “yes” for your personal financial situation, then the question becomes how to pay a lower amount of taxes. Strategies can include:
Buy and Hold
Holding on to stocks long enough for dividends to become qualified and for any capital gains tax to be in the long-term category because they are typically taxed at a lower rate.
Tax-loss Harvesting
As discussed, utilizing a tax-loss harvesting strategy can help you with offsetting your capital gains with capital losses.
Use Tax-advantaged Accounts
Putting your investments into retirement accounts or other tax-advantaged accounts may help lower your tax liabilities.
Refrain From Taking Early Withdrawals
Avoiding the temptation to make early withdrawals from your 401(k) or other retirement accounts.
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Taxes for Other Investments
Here’s a short rundown of the types of taxes to be aware of in regards to investments outside of stocks.
Mutual Funds
Mutual funds come in all sorts of different types, and owning mutual fund shares may involve tax liabilities for dividend income, as well as capital gains. Ultimately, an investor’s tax liability will depend on the type and amount of distribution they receive from the mutual fund, and if or when they sell their shares.
Property
“Property” is a broad category, and can include assets like real estate. The IRS looks at property all the same, however, from a taxation standpoint. In short, property is subject to capital gains taxes (not to be confused with “property taxes,” which are something else entirely. In effect, if you buy a house and later sell it for a profit, that gain would be subject to capital gains taxes.
Options
Taxes on options trading can be confusing, and tax liabilities will depend on the type of options an investor has traded. But generally speaking, capital gains taxes apply to options trading activity – it may be wise to consult with a financial professional for more details.
Investing With SoFi
For most investors, paying taxes on stocks involves paying capital gains taxes after they sell their holdings, or paying income tax on dividends. But it’s important to keep in mind that the tax implications of your investments will vary depending on the types of investments in your portfolio and the accounts you use, among other factors.
That’s why it may be worthwhile to work with an experienced accountant and a financial advisor who can help you understand and manage the complexities of different tax scenarios.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
FAQ
How much do you pay taxes on stocks?
How much an investor pays in taxes on stocks depends on several factors, including any applicable capital gain, how long they held the stock, and whether they received any income from the stock, such as dividend distributions.
Do you get taxed when you sell stocks?
Yes, investors do generate a tax liability when they sell a stock in the form of capital gains taxes. If the investor has generated a capital loss as the result of a sale, they can use it to offset tax liabilities generated by other capital gains.
How do you avoid taxes on stocks?
There are several strategies that investors can use to try and avoid or minimize taxes on stocks, including utilizing a buy-and-hold strategy, opting not to take early withdrawals, and utilizing tax-advantaged accounts.
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