When an asset is sold for a profit, the seller is subject to capital gains taxes. Tax rates change based on how long stocks are kept. You won't have to pay taxes on the sale if you make a loss. If you sell shares of stock for more than you purchased for them, the difference is your capital gain.
If you invested $10 in shares of XYZ Corporation and then sold them for $100, the $90 profit would be subject to capital gains taxation. If the investment yields a long-term profit, you may keep it for a while. How those taxes are handled and the rate you'll pay is different.
Stocks and the Taxation of Capital Gains
Your capital gains from stock investments will be taxed at a rate that is based on both your filing status and your adjusted gross income (AGI). Your effective tax rate will range from 0% to 20% of your final profit. If your adjusted gross income is between $44,626 and $492,300 (single filers) or $89,251 and $553,850 (joint filers), you will likely pay 15%. The top rate of 20% applies to anyone earning over $492,300 as an individual or $553,850 as a pair.
Profits from investments may be subject to additional taxes for those with a high net worth or income on top of the capital gains tax. If your modified adjusted gross income (MAGI) is over $200,000 for single filers or $250,000 for joint filers, the net investment income tax may apply, adding 3.8% to your capital gains tax.
Ways to Defer No Capital Gains Tax On Your Stock Sales
Some of the most typical approaches that can be incorporated into a budget are as follows:
1. Using Tax Losses
You can calculate your net gain or loss from trading on your tax return by offsetting capital gains with capital losses. Possible outcome: nil taxable capital gains. This method, known as "tax-loss harvesting," is widely used. The maximum annual deduction for net capital losses against ordinary income is $3,000. However, any excess losses can be carried forward indefinitely. If you plan to quickly reinvest the proceeds from the sale of a losing stock, you must be careful to avoid "wash sales" following applicable regulations.
2. Contribute to Your Retirement Accounts
When you invest in a retirement account, you avoid paying taxes on your profits. Stocks, bonds, and other investments can be bought and sold without incurring capital gains tax. Ordinary income taxes may be owed on distributions made through a Traditional IRA, 401(k), or other comparable arrangement. However, withdrawals from Roth accounts are completely tax-free.
3. Determine Your Costing Method
Choosing the cost basis of the shares you sell when liquidating your stock portfolio is possible. While your entire position in the investment may have gained value, you may be able to reduce or eliminate capital gains taxes by selling individual shares at a loss.
4. Donations of Stock
Are you contemplating a sizable gift to an eligible organization? Donating the stock is preferable to selling it, paying the capital gains tax, and presenting the earnings. That eliminates the need to pay any capital gains tax. Additionally, the market value of given shares held for more than a year will be deducted from your taxable income, resulting in a larger donation.
If your stock contribution causes you to exceed the yearly standard deduction amount, you can deduct the difference from your taxable income. If you are still determining the charitable use for the entire stock portfolio, consider donating the shares to a donor-advised fund. If you are lucky enough to be affluent, you may choose to establish a private foundation or charitable residual trust.
5. Reduce Your Tax Rate
Long-term capital gains may be taxed at 0% if your taxable income is low enough. Strategic withdrawals can help you reduce your taxed income. Withdrawals from a Roth IRA, unlike those from a 401(k) or standard IRA, are not subject to taxes once the account holder reaches retirement age.
\You can also maximize your deductions by paying two years' property taxes in one year or combining your charitable contributions from two years into one. Delaying income and maximizing deductions are other ways to avoid being pushed into a higher tax rate. Contributing the maximum allowed to employer-sponsored retirement plans and health savings accounts (HSAs) is a great strategy to lower your taxable income.
6. Qualified Small Business Stock
Qualified small business stock (QSB) in a private corporation can provide an income exclusion of up to $10 million, or ten times the cost basis, if held for at least five years. This differs from the "rolling over" capital gains strategy by reinvesting the proceeds from a sale in another company within 60 days. The company's gross assets can have been at most $50 million when it granted you the shares. See a related post on myStockOptions.com, a website specializing in tax and financial planning for all types of stock compensation, for additional information on the rollover deferral and the 100% gain exclusion options for QSB sales.
