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Have you made money selling stocks or other investments? Don't forget to set aside some of your profits to pay your tax bill. Capital gains taxes apply to money you've made selling investments for more than you paid. How much capital gains tax you owe depends on how long you held the stock before selling it and your tax bracket. Read on for the details.
What Are Capital Gains Taxes?
Profits from selling a stock are considered a capital gain. These profits are subject to capital gains taxes. Stock profits are not taxable until a stock is sold and the gains are realized. Capital gains are taxed differently depending on how long you owned a stock before you sold it.
- Long-term capital gains apply to stocks you've held for more than a year.
- Short-term capital gains apply to stocks you've sold less than a year after you purchased them.
If you sold a stock for less than you paid for it, you may be able to report the loss on your tax return and reduce your overall tax bill.
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Long-Term Capital Gains Tax Rates
Long-term capital gains are profits on investments held for more than a year. Depending on your tax bracket, the current long-term capital gains tax rates are 0%, 15% or 20%. Here's how rates break down by your income and tax filing status.
| Long-Term Capital Gains Tax Rates for 2022 | ||||
|---|---|---|---|---|
| Rate | Single | Married, Filing Jointly | Married, Filing Separately | Head of Household |
| 0% | Up to $41,675 | Up to $83,350 | Up to $41,675 | Up to $55,800 |
| 15% | $41,676 - $459,750 | $83,351 - $517,200 | $41,676 - $258,600 | $55,801 - $488,500 |
| 20% | $459,751 and up | $517,201 and up | $258,601 and up | $488,501 and up |
Source: IRS
Suppose you're single and your income for 2022 is $65,000. If you buy 100 shares of stock X for $4,000 and sell them for $6,700, your capital gain is $2,700. If you had owned stock X for more than a year, you would owe $405 (or 15%) in federal long-term capital gains tax on our hypothetical profit of $2,700. If your income was $500,000, you would owe $540 (or 20%) in taxes. And if your income was $40,000, you wouldn't owe capital gains tax at all.
Short-Term Capital Gains Rates
Short-term capital gains are profits on investments you've held for a year or less and are taxed as ordinary income. For the 2022 tax year, these are the tax brackets by income and filing status:
| Short-Term Capital Gains Rates for 2022 | ||||
|---|---|---|---|---|
| Rate | Single | Married, Filing Jointly | Married, Filing Separately | Head of Household |
| 10% | Up to $10,275 | Up to $20,550 | Up to $10,275 | Up to $14,650 |
| 12% | $10,276 - $41,775 | $20,551 - $83,550 | $10,276 - $41,775 | $14,651 - $55,900 |
| 22% | $41,776 - $89,075 | $83,551 - $178,150 | $41,776 - $89,075 | $55,901 - $89,050 |
| 24% | $89,076 - $170,050 | $178,151 - $340,100 | $89,076 - $170,050 | $89,051 - $170,050 |
| 32% | $170,051 - $215,950 | $340,101 - $431,900 | $170,051 - $215,950 | $170,051 - $215,950 |
| 35% | $215,951 - $539,900 | $431,901 - $647,850 | $215,951 - $323,925 | $215,951 - $539,900 |
| 37% | $539,901 and up | $647,851 and up | $323,926 and up | $539,901 and up |
Source: IRS
Say, in our example, you turned a $2,700 profit on stock X in two weeks. Your short-term $2,700 profit would be taxed at the same rate as your regular income. So again, if you're single and your income is $65,000, your short-term capital gains are taxed at 22%. If your short-term capital gain causes your income to rise into the next tax bracket, the portion of your gain that exceeds your current bracket will be taxed at the higher rate: For example, if you earn $40,000 and have a short-term capital gain of $2,700, the first $1,775 is taxed at 12% and the remaining $925 at 22%.
Additional Tax for High-Income Taxpayers
High earners pay an additional 3.8% net investment income tax (NIIT) on either long- or short-term capital gains. Taxpayers earning more than the income threshold level will need to pay the additional tax. Income thresholds are as follows:
| Filing Status | Income Threshold |
|---|---|
| Married filing jointly | $250,000 |
| Married filing separately | $125,000 |
| Single | $200,000 |
| Head of household | $200,000 |
| Qualifying widow(er) | $250,000 |
Source: IRS
How Are Dividends Taxed?
Dividends are income paid out to shareholders of a stock, mutual fund or other investment. They're typically paid quarterly or monthly, in cash or shares, and are taxable based on your income and the type of dividend paid.
- Qualified dividends come from investments in U.S. or qualifying foreign companies whose stock you've held for at least 61 days of a 121-day holding period. Qualified dividends are taxed at long-term capital gains rates.
- Non-qualified or ordinary dividends, which include most dividends paid to shareholders, are taxed at short-term capital gains rates.
IRS requirements for qualified dividends can be complicated. Fortunately, if you've earned dividends of $10 or more from any investment, you'll receive Form 1099-DIV or Schedule K. These forms report your dividend income as either qualified or ordinary dividends, so you don't have to make the distinction yourself.
How to Avoid Taxes on Stocks
You can't avoid taxes, but you can minimize them. One way is to hold on to investments for more than a year before selling them so you can take advantage of favorable long-term capital gains rates. Your broker (or brokerage software) should track this information to help you avoid selling stocks before their time. What if you're successfully making money on short-term gains? Even after taxes, short-term capital gains still put money in your pocket and are a net positive. Just remember to pay your taxes.
Then again, most of us prefer a lower tax bill to a higher one. A few more ideas for keeping your tax bill down:
- Use tax-advantaged accounts. Money held in retirement and college savings accounts aren't taxed until the money is withdrawn—or, in the case of 529 and Roth IRA accounts, it isn't taxed at all if you follow IRS guidelines.
- Try tax-loss harvesting. When your investments are down, consider selling some of your shares and "harvesting" the loss to offset income on your tax return.
- Donate stocks to charity. Giving stock that you've held for more than a year to a qualified charity could mean a tax deduction for the full market value of the stock—and avoiding long-term capital gains taxes.
- Sell when your tax bracket is low. Realizing gains when your income is low can keep your capital gains rate to a minimum. Remember, if your income is $41,675 or less, your long-term capital gains rate is zero.
Additional Tax Information to Consider
Finally, here are a few additional considerations to help you manage your stock-related tax bill with as little pain as possible.
Quarterly Estimated Taxes
If capital gains will likely increase your tax liability by $1,000 or more, consider making quarterly estimated tax payments on any capital gains you have throughout the year.
Quarterly estimated tax payments for the 2022 tax year are due on the following dates:
- April 18, 2022
- June 15, 2022
- September 15, 2022
- January 17, 2023
IRS Form 1040-ES can help you calculate your payment—or consult with your tax advisor.
State Taxes
You may also be subject to state taxes on capital gains. Check with your state tax board for more information.
Consult a Tax Pro
If you're doing more than a few trades a year—or if you're even mildly confused about how these taxes apply to you—consulting with a tax professional may be wise. They can help you devise a tax strategy for your stock profits and keep you on track with any taxes you owe.
Stay on Top of Your Tax Bill
Calculating and paying taxes on capital gains and dividends is definitely not the fun part of winning in the stock market. But understanding long- and short-term capital gains and dividends―and planning ahead to minimize and pay for your tax bill—helps make the process manageable.