Income Tax Implications on Stock

You Are Only Taxed When You Sell

• Whether your portfolio gains or loses value is of no concern to the IRS. It only takes note when you sell a stock and realize a profit or a loss. This is a taxable event and must be reported.
  
  

Lower Taxes for Buy-and-Holders

• Tax laws are written to favor investors who buy and hold stocks as opposed to speculators who trade frequently. For this reason, if you sell a stock more than year after you buy it, your tax rate is 15 percent. This special rate is called the long-term capital gains tax. Of course, this only helps you if your tax rate on income exceeds 15 percent, which is true for most people who own stocks.
  
  If you sell a stock less than a year from when you bought it, the profit is taxed as regular income.
  
  

Stock Market Losses Can Reduce Taxable Income

• If you lose money on a stock transaction, the loss can count against your taxable income, up to $3,000 for individuals and $1,500 for those who are married and filing separately from their spouse. If you loss exceeds $3,000, you can deduct the remainder from a future year.
  
  Some people use this strategy to reduce their taxable income during a year when they made more money than usual. They sell a losing stock to realize the loss, and then sometimes buy it right back, hoping to realize the gain during a year when their income is lower.
  
  If you plan to do this, talk to a tax professional, since a CPA can give you a clearer picture as to when it will be most advantageous to reduce your taxable income.
  
  

Special Cases

• Likewise, you should consult with a CPA if you are selling stock options, since the tax laws regarding these transactions are complex. There are also special tax breaks you can claim if you are selling a stock you have owned for more than five years and it is classified as an American small business, which means it has less than $50 million in assets. Again, this law is designed to reward buy-and-hold investors, and an accountant can help you with the details of claiming the tax break.
  
  

Put Aside a Portion of Your Profits

• In general, if you sell a stock for a profit, put aside at least 15 percent of the profit to pay taxes. That way, you can enjoy your earnings without worrying about an impending bill from the IRS.