Contents
Stock Investing Basics
Types of Stock
Stock Indices
How to Determine Your Level of Risk Tolerance
How to Plan Your Stock Portfolio
How to Research Stocks
How to Buy and Sell Stocks
How to Manage Your Stock Portfolio
Stock Investing and Taxes
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Stock Investing and Taxes
Like all other investments, stock investments are subject to state and federal taxes. To invest in stocks profitably, you must understand how taxes impact your gains and losses.
Capital Gains
A capital gain occurs when you sell a stock for more than your cost basis—the total you paid to acquire the shares. For example, if you buy stock that costs you $5,000 after commissions, then sell those shares later for $6,500, your capital gain is $1,500. That gain is subject to capital gains tax, which, as of 2006, ranges from 15–35% of your gain.
Long Term vs. Short Term Capital Gains
The capital gains tax rate you pay depends on how long you held (owned) the stock before selling it.
- Stocks held for one year or more: Are considered long-term capital gains and are subject to the lowest capital gains tax rate—15% (as of 2006).
- Stocks held for less than one year: Are considered short-term capital gains and are subject to your ordinary income tax rates, which are determined by your tax bracket. These rates can be as high as 35%.
Because long-term capital gains are usually subject to much lower tax rates than short-term gains, it almost always pays to hold on to any stock you buy for longer than one year.
Capital Losses
If you sell a stock for less than its cost basis, you incur a capital loss. Keep track of your losses: you can use them to offset your capital gains tax for a given year. For example:
- If you buy a stock for $12,000 and sell it later for $10,000, your capital loss is $2,000.
- If you incur that loss the same year in which you sold another stock for a $2,000 capital gain, the gain and loss would cancel each other out—you would not be required to pay any capital gains tax.
- If your capital loss was larger than your gain, you’d also be able to carry forward that loss to offset gains you might incur in future years.
Offsetting strategies can be complex, so consult a tax advisor before selling any stock for a significant gain or loss.
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