Just the other day I was talking to a co-worker about investing in stocks. He asked me about taxes which got me thinking “this is a good blog topic for tax time.” While I am not an accountant or an expert on taxes, I do love to research. Want to try to file your taxes yourself? It’s easy and can save you as much as $200 in filing costs when you file with Turbo Tax. Sign up for free with Turbo Tax and only pay when you file. Here are four frequently asked questions on paying taxes on your stocks and funds.
1. Do I have to pay taxes on my stocks?
Well that depends.
- If you sold your stock and made money, then the answer is yes.
- If you sold your stock and you lost money, then the answer is no. You can instead claim your losses as a tax-deductible expense.
- If you held your stock and it increased in value, the answer is no. You only owe taxes on “realized” gains.
2. How much taxes will I owe on my stock earnings?
Again, it depends. The percentages you pay depend on your income and whether or not you file as a single person, married filing separately, married filing jointly, or head of household. Capital gains are the profits you make from an asset such as a stock or a property.
- If you owned the stock for less than a year, you are subject to short-term capital gains tax. This is the same as your income tax rate.
- 10%, 12%, 22%, 24%, 32%, 35% or 37%.
- If you owned the stock for more than a year, you are subject to long-term capital gains tax.
- 0%, 15%, 20%.
If you are a day or swing trader, you will end up paying more in taxes with short term capital gains. If you can hold your asset (stock, bond, or ETF) for more than 1 year, you will end up paying less in taxes. Be sure to include your losses. If you sold your stock in Tesla for $5000 profit and sold your stock in Pfizer at a loss of $1000, you will end of paying capital gains taxes on $4000.
3. Is there anyway I can reduce, avoid or delay paying capital gains tax on my stocks?
- Length of Investment – Try to hold on to your stocks for more than 1 year to pay the smaller tax rates found under long term capital gains.
- Use a Tax-Advantaged Account – If you invest in stocks and bonds through a Roth IRA, HSA or 529 account, your assets will grow tax-free. If you invest through a Traditional IRA or 401k, your asset growth will be tax deferred, meaning you won’t pay taxes until you withdraw your earnings.
- Tax Deductions – If your losses exceed your gains, you can deduct the difference on your tax return. Up to $3000 per year (single), or $1500 per year (married). If you lost more than $3000 (single) or $1500 (married), the IRS allows you to carry over your losses into the next tax year.
- Tax-Loss Harvesting – Consider selling your underperforming stocks to offset your capital gains. Many robo-advisors such as Betterment and Wealthfront can do this for you.
4. How do I pay these taxes?
Your brokerage will provide you with Form 1099-B by February 15th. This form will outline short-term and long-term capital gains and losses. If you file your taxes yourself using a software like Turbo-Tax, you can import your 1099-B from your brokerage, making it easier to file for taxes.
If you have sold your stocks, bonds, or ETF’s this year, I would suggest that you keep that money in your brokerage account or a savings account. Doing this will ensure you have enough money to pay for taxes after you file your income tax return.
New to Investing?
While I use Betterment and Wealthfront for my passive retirement fund, I invest in stocks and ETF’s with the following brokerages: CashApp, Robinhood, Webull, and M1 Finance. CashApp is for beginner investors and only has the most popular stocks along with Bitcoin. Robinhood is great for beginners who like to actively trade in the stock market, but they don’t have the best reputation. Webull is great for intermediate to advanced traders with its immense data analysis, and M1 Finance is great for the beginner long term investor or dividend investor. Below are my referral links if you would like to join:
- Betterment: Get $5000 managed free for a year + Tax-Loss Harvesting
- Wealthfront: Get $5000 managed free for a year. + Tax-Loss Harvesting
- CashApp: Get $5 when you send or receive money
- M1 Finance: Get $10 when you deposit $100 within 30 days.
- Robinhood: Get 1 free stock worth up to $500
- Webull: Get 2 free stocks when you fund your account with $100 within 30 days, and more free stocks when you refer a friend.
- TurboTax: Join for free, pay when you file. An easy way to do your own taxes.
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