The tax man always gets his cut. If you sell stocks at a profit, then you’ll owe taxes on those gains. And depending on how long you’ve owned the stock, you’ll either owe at your regular income tax rate or at the capital gains tax rate, which is usually lower than the former. To pay taxes you owe on stock sales, you’ll use IRS Form 8949 and Schedule D.
If this sounds overwhelming, don’t worry; a financial advisor can help you with tax planning for your investments, as well as retirement.
The Basics on How to Pay Taxes on Stocks
If you sell stock for less than you bought it for, you won’t owe any income tax on the losses. In fact, you may be able to use this loss to reduce your tax liability. If you sell stock for more than you paid, however, you’ll have a profit. And you may need to pay taxes on that gain.
If you’ve owned the stock for less than a year before selling it at a profit, you’ll owe taxes on it at your regular income tax rate. If you owned the stock for more than a year, the long-term capital gains tax rates will apply. These rates are dependent on your overall income, but may be 0%, 15% or 20%.
You can use SmartAsset’s capital gains calculator to estimate the taxes you’ll owe. The calculator can also help determine the estimated capital gains taxes on profits from the sales of other assets, such as real estate, collectibles and cryptocurrency.
A basic strategy for reducing taxes on stock sale profits is to hold stocks that have appreciated since purchase for at least a year before selling them. This ensures profits on stock sales will be taxed at the capital gains rate, which is usually lower. Another approach is to sell stocks that have declined in value in order to generate a loss that can be used to shelter gains.
Note that whether you owe income taxes at your regular rate or the capital gains rate, you don’t owe Social Security or Medicare taxes on gains from the sales of stocks. Investment income, including profits from stock sales, as well as dividends and interest, is considered passive income and does not pay these taxes. However, passive income is subject to federal, state and local income taxes.
Using IRS Form 8949 to Pay Taxes on Your Stocks
Whether you show a profit or a loss, you’ll report stock sales on IRS Form 8949. This is the tax form used for reporting sales or exchanges of any capital assets not reported elsewhere.The information about stock sales needed on your Form 8949 should come from a Form 1099-B issued by the brokerage you’re using. This will identify the stock, the dates it was acquired and sold, the sale price and cost of the stock, the profit or loss, and any federal or state income taxes that were withheld. The IRS and state taxing authorities will also get a copy of the 1099-B. If you don’t get a 1099-B from your brokerage for some reason, use your own records to fill out Form 8949.
Form 8949 has two parts. The first is for short-term transactions on assets held less than a year. To fill out each part, on the first line enter the information for each stock you sold under the appropriate column. You’ll provide the stock name and number of shares, purchase and sale dates, sale price, cost, and profit or loss.
You won’t usually need to enter anything in the columns for adjustments. See the instructions for Form 8949 for details. At the bottom of the form, total the amounts in the columns for sale price, cost and profit or loss.
On the second part of the form, enter the same information for sales of assets held for more than a year.
Filling Out Schedule D
Schedule D is one of the schedules that is part of Form 1040. After filling out Form 8949, taxpayers transfer the totals to Schedule D. From this they can generate the overall gain or loss from stock transactions.
Like Form 8949, Schedule D also separates transactions into long- and short-term gains. The difference is still based on whether the asset was owned for a year or less.
The totals from Schedule D get transferred to the taxpayer’s 1040 on line 7. Also, any tax that the brokerage withheld when the stock was sold will be reported on Form 1040. You can learn more from the IRS instructions for Schedule D.
Bottom Line
Investors who buy and sell stocks will reports the gains and losses to the IRS on Form 1040 using Form 8949 and Schedule D. These forms separate stock sale profits into long- and short-term capital gains. The difference between them is that long-term gains are taxed at the potentially lower capital gains rate, while investors pay taxes on short-term gains at their regular tax rates, which are usually higher.
Tax Planning Tips
- In crafting a tax-efficient strategy to make the most of your investment gains, it can be helpful to enlist the aid of a financial advisor.Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- See how the gains you make when selling stocks will be impacted by capital gains taxes by using this no-cost calculator.
Photo credit: ©iStock.com/Tempura, ©iStock.com/mediaphotos, ©iStock.com/PeopleImages
