Making money by investing in stocks is the best feeling. Some people even use stock investments to fund their IRAs, which ultimately make it possible for them to retire comfortably.
A positive return in the stock market lets you know that your money is working for you. At the end of the day, taxes must be paid on every single transaction you make, both in and out of the world of stocks and investments. Today, we’re going to go over when to pay taxes on stocks and other tax considerations.
When do you pay taxes on stocks?
Taxes are paid on an annual basis, and in most cases, taxes are due on Tax Day, which is usually on April 15th of every year. However, recently, Tax Day has been pushed back a few months as the result of the COVID-19 pandemic.
But when it comes to stock, you do not have to worry about paying taxes as long as your money is still invested in stocks that are part of the stock market. Once you sell a stock, those profits will result in a taxable scenario known as capital gains. So, you will only be taxed on stocks once you sell them and earn money from those sales.
Most brokers will provide an annual statement detailing the gains and the losses that you experienced each year. More specifically, brokers will likely notify you if you experienced any taxable events at all each year.
This makes it easier for you because you won’t have to go back through your files and look at each year’s transactions in order to calculate your gains and losses on your own. If you do not receive a statement from your broker, be sure to contact your broker and ask if they plan to send this information to you.
When you buy or sell your investments
Here’s an example to help you better understand when to buy or sell your investments. Robby bought $100 worth of Apple stocks two years ago, and now, his stocks are worth $150. Robby can sell $100 worth of his Apple stocks without triggering a taxable event, but as soon as he sells any of his capital gains, he will be required to pay taxes.
Just like Robby, you won’t ever have to pay taxes on the money that you initially put into the stock market. With this logic in mind, Robby will not have to pay taxes on the initial $100 that he invested in Apple stocks. However, Robby will have to pay taxes on the $50 that he earned through that investment once he sells his stocks.
Making money with stocks is possible, and it happens on a daily basis. In fact, there are millionaires who buy and sell stocks for a living. As always, it is wise to become educated about the stock market if you plan to buy and sell stocks, especially when taxes can differ so drastically.
When you earn dividends and interest
Dividends are a company’s way of rewarding investors with regular payments based on the amount of stock that you own. There are quite a few companies that offer dividends, and these dividends have their own tax rate, called the dividend tax rate.
Your dividend tax rate is based on your income level. However, you will not be required to pay more than 20% of your income as that is the maximum tax rate. These dividends are not taxable events if they are within a traditional IRA, as long as the funds stay within that investment account.
Interest is another word for returns. You will not have to pay taxes on the positive return until the return is sold. The taxes that you face in response to your sales will always depend on the actual act of selling the stock. As soon as there is a transaction involved, then taxes come into the picture.
When do I not have to pay taxes on stocks?
Generally speaking, as soon as you make any profits from your stocks, the situation will then be recognized as a taxable event. The only way to avoid paying taxes when selling any gains is by utilizing tax-advantaged retirement accounts.
But even when you have tax-advantaged retirement accounts in your name, you will still be required to pay taxes on the profits that you have made. Capital losses, which are stocks that are sold for less than they were purchased for, do not incur taxes.
It would not make sense to pay taxes on something that you lost because you don’t make a profit. Rather, you’ve lost money. For the sake of perspective, if you were walking down the street and you dropped a $10 bill, then you would not be required to pay taxes on that $10 because it’s no longer in your possession nor did you profit off of it.
The same scenario applies to the stock market. You wouldn’t have to pay taxes if you invested $100 in Apple stocks and it dropped down to $80 at the time of sale.
Additional tax information to consider
There are a lot of moving pieces involved in the processes of buying and selling stocks. It is wise to hire a financial planner if you don’t know where to start because it can be quite confusing all around. But here is some additional tax information that you should keep in mind!
Short-term capital gains
When an investment is sold within a year of being purchased, it is considered a short-term capital gain. Short-term capital gains are taxed at either the capital gains tax rate or the ordinary income rate.
Long-term capital gains
When an investment is sold after a year of the initial purchase date, it is known as a long-term capital gain. Once a year has passed, stock can be sold at the long-term capital gain rate, which can only be up to 20% of the original purchase price, though the tax rate will depend on your income level.
Capital losses
A capital loss is when you sell stock that you lost money on, which will actually help offset your tax liability. You won’t be liable for taxes on capital losses up to $3,000.
Think about the long term
Investing in stocks is a fantastic way to make money. You will end up paying much less in taxes when you hold your stock for at least one year. You will also end up saving a lot of money when you pay the capital gains rate rather than the ordinary income rate.
At the end of the day, it is better to have a positive return than a negative return. If you are in need of more information regarding tax liabilities and stocks, be sure to visit 1040.com.
Pay taxes for the gains
When it comes to stocks, taxable events favor long-term investments much more than they benefit short-term investments. Even so, it is better to have a positive return on investment and pay tax as a result than it is to lose money despite avoiding taxes. Taxes are not fun, but always remember that you’re paying taxes because you made money, and that’s a good position to be in
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