Gains on stock investments will be taxable in the current year unless they can be offset with losses. Stocks that appreciate in value do not incur any tax liability while they are held, unless they pay dividends.
Dividends will generally be taxable as ordinary income. For this article we will focus on capital appreciation instead of dividends.
Capital appreciation can be considered long-term gains or short-term gains by the IRS upon the sale of the shares. A stock held for less than a year will incur short-term capital gains taxes, which are taxed at ordinary income rates.
A stock held for longer than a year will have its gains taxed at the long-term capital gains rate of the shareholder. Long term capital gains taxes have historically been lower than income taxes, and range from 0%-20%. Most middle-class to upper-middle class investors will be in the 15% long term capital gains tax bracket.
The possibility of losing money on stocks is always present, but there is an upside. If you sell a stock for a lower price than you originally purchased it for, the Capital Loss you suffer can offset your Capital Gains and reduce your taxable income.
This is known as tax loss harvesting. The process of managing your capital gain taxes and losses is very important. Basically, short term capital gains can be offset by short term losses, and long term capital gains can be offset by long term losses; then they can be used to offset each other or even up to $3,000 of income taxes a year.
Unused amounts of tax-loss credit can be carried forward for an indefinite amount of time. Of course, this information could benefit from the scrutiny and expertise of a CPA, so you should consult with yours before making any determinations or decisions regarding such tax-related matters.
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