Taxes on Stocks: What You Have to Pay & How to Pay Less

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Do you have to pay taxes on stocks?
How are stocks taxed?
Capital gains tax on stocks
- Short-term capital gains tax: A tax on profits from the sale of an asset held for a year or less. Short-term capital gains tax rates are taxed as regular income, which means they're subject to federal income tax rates.
- Long-term capital gains tax: Long-term capital gains tax is a tax on profits from the sale of an asset held for longer than a year. Long-term capital gains tax rates are 0%, 15% or 20%, depending on your taxable income and filing status.
When do you pay taxes on stocks?
Do you pay taxes on stocks you don't sell?
How are dividends taxed?
- In both cases, people in higher tax brackets pay more taxes on dividends.
- How and when you own a dividend-paying investment can dramatically change the tax bill on the dividends.
- There are many exceptions and unusual scenarios with special rules; see IRS Publication 550 for the details
.
What is net investment income tax?
How to avoid taxes or pay less when selling stocks
1. Think long term versus short term
- Holding the shares long enough for the dividends to count as qualified might reduce your tax bill. Just be sure that doing so aligns with your other investment objectives.
- Whenever possible, consider holding an asset for longer than a year, so you can qualify for the long-term capital gains tax rate when you sell. That tax rate is significantly lower than the short-term capital gains rate for most assets. But again, be sure that holding the investment for that long aligns with your investment goals.
2. Look into tax-loss harvesting
- Dividends and capital gains on stock held inside a traditional IRA are tax-deferred (and tax-free if you have a Roth IRA). Dividends and capital gains on stocks in a regular brokerage account typically aren’t.
- Once the money is in your 401(k), and as long as the money remains in the account, you pay no taxes on investment growth, interest, dividends or earnings. A Roth 401(k) has similar benefits as a Roth IRA: your investments grow tax-free and your money comes out tax-free in retirement.
- You can convert a traditional IRA into a Roth IRA so that withdrawals in retirement are tax-free. But note, only post-tax dollars get to go into Roth IRAs. So if you deducted traditional IRA contributions on your taxes and then decide to convert your traditional IRA to a Roth, you’ll need to pay taxes on the money you contributed, just like everyone else who invests in a Roth IRA.
- If you invest with a robo-advisor, many offer free tax-loss harvesting.
4. Call in a pro
Article sources
- 1. Internal Revenue Service. About Publication 550, Investment Income and Expenses. Accessed Jan 23, 2024.
- 2. Internal Revenue Service. Topic No. 559 Net Investment Income Tax. Accessed Mar 14, 2023.
- 3. Internal Revenue Service. Topic No. 409 Capital Gains and Losses. Accessed Jan 23, 2024.