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Editor’s Note: This story was originally Penny Horder.
There are many things to consider when selling stock, including the tax liability.
People sell stocks for a variety of reasons. However, if you make a profit on the sale, you will generally need to report it in the following year’s tax return.
(Other rules apply when selling shares within a retirement account.)
Before you hit the trade button, make sure you understand what happens when you sell stocks.
Everything you need to know is here.
know when to sell stocks
There is no “perfect” time to sell stocks. The best time to sell depends on your personal investment strategy. risk tolerance and time horizon.
Stock prices go up and down, so you don’t want to sell a good stock just because it temporarily went down. Conversely, you don’t want to hang on to a plummeting stock with little hope of recovery.
For most investors, holding stocks for the long term is the best strategy. Avoid impulse buying and selling during periods of stock market downturn. As they say: Market time is better than market timing.
Still, sometimes it makes sense to sell. In general, selling stocks is not a good decision only when driven by emotion rather than by data and research.
It makes five times more sense to sell stocks
- You need money and you can sell profitably.
- The company’s performance is weak relative to its competitors and the outlook is bleak.
- If the company commits fraud, files for bankruptcy, or is involved in a crime.
- The company has gone through a major change (such as a merger or acquisition) and I no longer agree with its ethics or leadership.
- You have done your research and believe that your money could be better invested elsewhere.
How to Sell Stocks: Correct Order Types
The order type determines how the stock is sold. Choosing the right order type can maximize your profits and minimize your losses.
There are three main order types:
- market
- limit order
- stop (or stop loss)
market order
Market orders execute trades quickly, but do not guarantee an accurate stock price. They typically sell at or near the current market price, but may fluctuate, especially if trades are executed outside trading hours.
As US Securities and Exchange Commission (SEC) said:
limit order
This type of order sells the stock only at a specific price.
Example: The stock is currently worth $75. You place a sell limit order at $80. The stock will not sell unless it goes above $80.
Stop Order (or Stop Loss Order)
A limit order executes a sale when the stock price reaches a certain price, while a stop order executes a sale when the stock price falls to a certain price.
Once the stop price is reached, the stop order becomes a market order.
You can use this type of order to limit your losses. For example, if you place a Stop Loss order at a price 10% below the price you bought the stock, your loss will be capped at 10%.
Conversely, a temporary drop in price can trigger a stop-loss sale when you really don’t want it.
How does the sale of shares affect taxes?
Whether you have to pay taxes after you sell your stock depends on where you sold it (retirement account or taxable brokerage account).
sell shares in retirement account
Retirement accounts are often called tax-advanced accounts, and for good reason.
If you sell assets such as stocks in your retirement account, you won’t have to pay taxes until you withdraw the money.
can open personal retirement account (IRA) yourself or you can open a 401(k) or similar account (403(b) or 457 plan) with your employer.
Once money is deposited into your 401(k) or IRA, you will not pay taxes on investment income, interest, or dividends as long as the money remains in your account.
If you have a Roth retirement account, you can withdraw money tax-free as long as you are 59.5 years of age or older.
Sale of shares in a taxable securities account
When selling shares within a taxable brokerage account, the tax implications are very different.
Even if you don’t take your money out, if you sell your stock for more than you originally paid for it, you will be taxed. As tax time approaches, you will need to report these capital gains on your tax return.
The amount you owe depends on how long you’ve held the stock and your income level.
If you sell shares at a loss in a taxable brokerage account, you do not have to pay taxes. In fact, selling stock at a loss actually helps lower your tax bill.
If you don’t sell your shares, you don’t have to pay capital gains tax, but you may have to pay tax on dividends from the shares you own.
sell shares for profit
A capital gain is the difference between the amount originally paid for the stock and the amount sold.
For example, if you bought $1,500 of Amazon stock and sold it a few years later for $2,000, your capital gain would be $500.
You will be taxed on the capital gain ($500), not the selling price ($2,000).
How much tax you are obligated to pay depends on how long you owned the stock.
- Less than 1 year: Your profits are taxed at the short-term capital gains rate, which is basically the normal income tax rate. (Regular income tax rate is based on your income tax rate tax bracket.) rates range from 10% to 37% for tax year 2022.
- Over 1 year: Profits are taxed at a long-term capital gains rate of 0%, 15%, or 20%, depending on income.
Capital gains tax is not limited to the sale of shares. They influence the sale of almost all investment assets, including exchange-traded funds (ETFs), mutual funds, and cryptocurrencies.
Short-term capital gains are taxed at normal income tax rates.
2022 Long-Term Capital Gains Tax Rate: 0% Tax Rate
- Single tax return status: $0 to $41,675
- Married, Joint Filing Tax status: $0 to $83,350
- Married, Separated tax filing status: $0 to $41,675
- Head of household tax status: $0 to $55,800
2022 Long-Term Capital Gains Tax Rate: 15% Tax Rate
- Single tax return status: $41,676 to $459,750
- Married, Joint Filing Tax status: $83,351 to $517,200
- Married, Separated tax filing status: $41,676 to $258,600
- Head of household tax status: $55,801 to $488,500
2022 Long-Term Capital Gains Tax Rate: 20% Tax Rate
- Single tax return status: $459,751 and up
- Married, Joint Filing Tax status: $517,201 and up
- Married, Separated tax filing status: $258,601 and up
- Head of household tax status: Over $488,501
Ownership for more than 1 year is tax deductible
In most cases, you will pay a higher tax rate when selling short-term investments (holding less than a year) than when selling long-term investments.
Here is an example.
Let’s say you earn $40,000 a year:
- If you sell shares that you have held for more than a year, you do not have to pay taxes on the gains.
- A short-term capital gains tax rate of 12% (based on the tax rate) applies to the sale of shares held for less than one year.
Benefits for high income earners
Long-term holdings are especially advantageous for high-income earners.
Let’s say you make $3 million a year:
- Any sale of a long-term investment is taxed at the 15% capital gains tax rate.
- Any sale of short-term investments is taxed at the normal income tax rate of 35%.
sell stocks at a loss
If you sell shares at a lower price than you bought them, you will incur a capital loss.
Capital loss is a good thing in the right circumstances. You can offset capital gains, limit your tax liability, and even reduce your taxable income.
- Capital losses can be used to offset capital gains. Did you make a big profit earlier in the year? Selling stock at a loss can reduce or even eliminate the taxes you owe on your capital gains.
- You may be able to use that loss to reduce your taxable income: Did you lose more than you gained this year? excess loss You can lower your taxable income (up to $3,000).
- Alternatively, losses can be carried forward to future tax years. Capital losses this year he exceeded $3,000?You can carry these losses forward to offset future capital gains.
Know the wash sale rules
If you’re looking to cut your taxes by selling stocks at a loss, be aware of the IRS wash sale rules.
The rule prohibits the sale of a security at a loss and the subsequent repurchase of the same security within 30 days. The wash sale rule exists so people don’t sell stocks at a loss just to take advantage of tax breaks.
The rules do not prohibit sales per se. Losses cannot be claimed for tax purposes.