Taxes on Stocks Explained

Taxes on stocks must be paid when an individual earns dividends as a shareholder or sells stocks for a profit, creating taxable events that require proper reporting on your tax return.

Types of Stock Taxes

Capital Gains Tax

When you sell stocks for more than you paid, you realize a capital gain. The tax rate depends on how long you held the stock:

• Short-term capital gains: Stocks held for one year or less, taxed as ordinary income
• Long-term capital gains: Stocks held for more than one year, taxed at preferential rates (0%, 15%, or 20%)

Dividend Tax

Dividends received from stock ownership are generally taxable. Most dividends qualify for long-term capital gains tax rates, but some dividends are taxed at ordinary income rates.

Tax-Loss Harvesting

You can offset capital gains with capital losses from other investments. If your losses exceed your gains, you can deduct up to $3,000 of net losses against other income annually, with remaining losses carried forward to future years.

Record Keeping Requirements

Maintain detailed records of all stock transactions, including:

• Purchase dates and prices
• Sale dates and prices
• Brokerage fees and commissions
• Dividend payments received
• Stock splits and other corporate actions

Tax-Advantaged Accounts

Consider holding stocks in tax-advantaged accounts like 401(k)s and IRAs to defer or eliminate taxes on gains and dividends, allowing your investments to grow more efficiently.