Selling Stocks? 3 Tax Consequences to Be Aware Of
KEY POINTS
- Some investors may be inclined to sell stocks now given recent market turbulence.
- It could pay to consult a tax professional before selling stocks in a brokerage account.
It's important to think before you sell.
Loading up your brokerage account with stocks is a great way to grow long-term wealth. But there may come a point when you decide it's time to sell some stocks.
If you're going to sell a stock, it's important to know how that might impact your tax situation. Here are three consequences that could ensue from the sale of a stock.
1. Capital gains taxes
When you sell a stock at a price that's higher than what you paid for it initially, you're charged capital gains taxes. Right now, stocks are down compared to where they sat a year ago. But if you bought your stocks a decade ago, you might still be looking at capital gains -- even if you're seeing recent losses in your portfolio.
Now the amount of your capital gains tax will depend on how long you held your stocks before selling them. Assets held for at least a year and a day are taxed as long-term gains. And that means you get to enjoy a more favorable tax rate. On the other hand, stocks held for a year or less are subject to short-term capital gains, and that means paying more tax on them.
Keep in mind that if you're selling stocks at a loss -- say, you bought shares 10 months ago for $500 that are now only worth $400 -- you won't be taxed on that loss. In fact, if anything, you can use that loss to your advantage. Specifically, you can use capital losses to offset capital gains, or to offset a limited amount of ordinary income.
2. The potential to bump yourself into a higher tax bracket
If you make a large profit by selling some stock, it'll increase your tax liability the year you make your sale. And that could, in turn, bump you into a higher tax bracket. That could mean paying a higher tax rate on your highest dollars of earnings. And it could also mean losing more of your regular earnings to taxes.
3. The need to make estimated quarterly tax payments
If you make a few hundred dollars selling stocks and otherwise are a salaried worker with taxes withheld from your paycheck, you may not need to pay the IRS extra money during the year. Even if you owe a bit of money during next year's tax season, if it's a small amount, you'll generally avoid penalties.
But if you're looking at a large amount of capital gains, you may need to make estimated quarterly payments to the IRS or otherwise risk being penalized for underpaying your 2022 taxes. That's not something you want.
Ask for help
If you're not sure whether selling stocks is a good idea or not from a tax perspective, consult with a tax professional who can offer guidance. You may, for example, be told to hold off on selling a stock to bump yourself into a more favorable capital gains category. Plus, if you do end up needing to make estimated payments, a tax professional can help you calculate what you owe so you don't overpay or underpay every quarter.
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