Taxes on Stocks: A Guide for Beginners

Written By
Julija A.
Updated
August 29,2022

The subject of taxes is quite complex, and the taxation of stocks can be one of the more confusing areas. How do taxes on stocks work? What are capital gains taxes? How do you pay taxes on stock sales?

In this article, we’ll try to answer all of these questions, and more! We’ll provide an in-depth explanation of how capital gains tax rates work and give you a few tips on how to pay less in taxes when selling your stocks.

So, let's get started!

Capital Gains Taxes - The Basics 

When people invest in stocks, bonds, or other assets, they hope to see the value of their investment increase over time. If they sell their asset for an amount greater than what they’d initially paid, they will have a capital gain.

For example, let's say you buy a stock for $100 and sell it for $150 at a later date. You’ve made a capital gain of $50, and that is the amount that will be taxed.

Taxes on stock trades work differently than taxes on regular income, and the tax rate depends on how long you keep the investment before you decide to sell it.

Short-term capital gains, which are gains on assets held for one year or less, are taxed at the same rate as ordinary income. Long-term capital gains, which are gains on investments held for more than one year, are taxed at a lower rate.

Capital gains taxes are an essential part of our tax system, and properly reporting your stock taxes is important. By taxing long-term capital gains at a lower rate compared to ordinary income, the government provides an incentive for people to invest their money.

This promotes economic growth and helps create jobs. It also allows people to keep more of their hard-earned money so that they can reinvest it in other assets or use it to improve their standard of living.

Long-Term Capital Gain Tax Rates

As we mentioned before, the capital gains tax rate depends on multiple factors, such as how long the investment has been held and what type of asset it is. Also, single taxpayers and married taxpayers are taxed at different rates.

If you’re unsure how to pay taxes on your stock gains, here are the long-term capital gain tax brackets for 2022:

Rate

Single

Married couples filing jointly and qualifying widowers

Married filing separately

Head of household

0%

Up to $40,400

Up to $80,800 

Up to $40,400

Up to $54,100

15%

$40,400 - $445,850

$80,800 - $501,600 

$40,400 - $250,800

$54,100 - $473,750

If your taxable income exceeds the amounts above, the net capital gain tax rate of 20% will apply. 

Also, there are a few exceptions when it comes to capital gains taxation. If you sell collectables or section 1202 qualified small business stock, you will be taxed at a maximum rate of 28%. And, if you have a net capital gain from selling a section 1250 property, you will be taxed at a maximum rate of 25%. 

Tips for Lowering Your Stock Taxes

Anyone who owns stocks is subject to taxes on their capital gains, but there are some strategies you can use to minimize the amount you owe.

One way to lower your taxes on stock gains is to hold onto your stocks for at least a year before selling them. This is because long-term capital gains are taxed at a lower rate than short-term capital gains. 

Another way to reduce your tax liability is to take advantage of tax-sheltered accounts such as IRA and 401(k). These accounts allow you to reinvest your capital gains without paying taxes on them.

Finally, keep in mind that losses can offset gains for tax purposes. So, if you have stocks that have decreased in value, selling them may help you reduce your total tax bill. This investing strategy is also known as tax-loss harvesting and includes selling stocks at a loss to offset capital gains you may have. 

By following these tips on how to pay less in taxes on stocks, you can keep more money and grow your stock portfolio more quickly. However, it’s important to stay on top of your tax bill and make sure that you pay capital gains taxes on time.

If you’re unsure how to file your taxes or when to pay taxes on stocks, you should speak to a tax advisor. They can help you navigate the complex world of capital gains taxes and ensure you follow all the rules.

Bottom Line

Capital gains taxes are levied on the profits realized from selling securities or other capital assets. Short-term capital gain tax rates are equal to your marginal income tax rate, while long-term capital gains tax rates are lower, maxing out at 20% for most taxpayers. 

You can minimize your taxes on stocks by holding them for the long term and by taking advantage of tax-advantaged accounts, such as IRAs and 401(k)s. If you own stocks, it's important to stay on top of your capital gains so that you can properly budget for any taxes you may owe.

FAQ

Do I have to pay taxes on stocks?

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If you sell stocks for an amount greater than what you paid for them, you will owe taxes on your capital stock gains. Therefore, you will have to pay taxes on them. The capital gains tax rate depends on multiple factors, including how long you’d held the stocks before selling them and how much money you made from the sale. 

Can I reinvest capital gains to avoid taxes?

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If you’re interested in knowing how to avoid paying taxes on stocks, you can always reinvest your capital gains. However, you will still have to pay taxes when you sell the reinvested stocks. There are a few different ways that you can go about reinvesting them in order to avoid paying too much in taxes, however. 

One option is to simply reinvest the money into the same asset that you initially gained it from. For example, if you sold a stock for a profit, you could put that money back into buying more shares of the same stock. Another option is to reinvest your capital gains in a completely different asset.

Do you have to file taxes on stocks every year?

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No, you don't have to file taxes every year on stocks. The IRS only requires you to pay taxes once you sell your assets. 

What happens if I don't pay taxes on stocks?

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If you don't pay your taxes, the IRS can penalize you in multiple ways. The penalty depends on how much you owe and whether you filed your taxes on time. Some potential penalties include the IRS putting a lien on your property or garnishing your wages.

About author

Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.

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