Taxes on Stocks: What You Have to Pay and How to Pay Less

Investing can be a great way to build wealth and financial security, but it’s important to understand how the sale of stocks could affect your tax bill.

If you sell stocks for a profit, your earnings are known as capital gains and are subject to capital gains tax.

Generally, any profit you make on the sale of an asset is taxable at either 0%, 15% or 20% if you held the shares for more than a year, or at your ordinary tax rate if you held the shares for a year or less. Any dividends you receive from a stock are also usually taxable.

There are two types of taxes on realized stock gains: short-term and long-term capital gains taxes. Tax rates on long-term capital gains are usually lower than those on short-term capital gains. That can mean paying lower taxes on stock sales.

• Short-term capital gains tax: A tax on profits from the sale of an asset held for a year or less. Short-term capital gains tax rates are taxed as regular income, which means they’re subject to federal income tax rates.

• Long-term capital gains tax: Long-term capital gains tax is a tax on profits from the sale of an asset held for longer than a year. Long-term capital gains tax rates are 0%, 15% or 20%, depending on your taxable income and filing status.

No. Even if the value of your stocks goes up, you won’t pay taxes until you sell the stock. Once you sell a stock that’s gone up in value and you make a profit, that’s when you’ll have to pay the capital gains tax.

When the value of your stocks goes up, but you haven’t sold them, this is known as “unrealized gains.”

Similarly, if the value of your stocks goes down and you haven’t sold them, this is known as “unrealized losses.” Selling a stock for profit locks in “realized gains,” which will be taxed. However, you won’t be taxed anything if you sell stock at a loss. In fact, it may even help your tax situation — this is a strategy known as tax-loss harvesting.

Note, however, that if you receive dividends, you will have to pay taxes on those when they are paid out.

For tax purposes, there are two kinds of dividends: qualified and nonqualified. The tax rate on qualified dividends is 0%, 15% or 20%, depending on your taxable income and filing status. This is usually lower than the rate for nonqualified dividends. The tax rate on nonqualified dividends, sometimes called ordinary dividends, is the same as your regular income tax bracket.

• In both cases, people in higher tax brackets pay more taxes on dividends.

• How and when you own a dividend-paying investment can dramatically change the tax bill on the dividends.

• There are many exceptions and unusual scenarios with special rules; see IRS Publication 550 for the details^[0]

Taxes on stocks and dividends are incurred in the tax year the stock is sold or the dividend payment is made.

By mid-February of the following year, you’ll get paperwork from your brokerage that will help you tally up your total gains and losses to determine the tax bill. For example, if you sold securities through a brokerage account in 2024, you’ll receive a 1099-B, which will detail your transactions. You’ll use that information for your 2024 tax return, filed in April 2025.

However, people who aren’t subject to income tax withholding (such as freelancers) are often required to make quarterly estimated tax payments. If you’re in that group, your dividend and capital gains tax would be due on the quarterly due date following the dividend receipt and/or sale.

If you aren’t having enough tax withheld on your W-4 to cover the taxes incurred from the gain — or you expect the gain to have a big impact on your tax bill — paying estimated taxes can also help you avoid a surprise or underpayment penalty when you file.

Some high-income investors may also be subject to an additional 3.8% tax called the net investment income tax. The IRS imposes this tax on either your net investment income or the amount by which your modified adjusted gross income exceeds a certain threshold (below), whichever one ends up being less.

The income thresholds for the net investment income tax are $250,000 for those married filing jointly, $125,000 for those married filing separately, and $200,000 for single filers and heads of household^[0]

• Holding the shares long enough for the dividends to count as qualified might reduce your tax bill. Just be sure that doing so aligns with your other investment objectives.

• Whenever possible, consider holding an asset for longer than a year, so you can qualify for the long-term capital gains tax rate when you sell. That tax rate is significantly lower than the short-term capital gains rate for most assets. But again, be sure that holding the investment for that long aligns with your investment goals.

As a reminder, selling stock at a loss may come with tax advantages. The difference between your capital gains and your capital losses is called your “net capital gain.” If your losses exceed your gains, however, that’s called a “net capital loss,” and you can use it to offset your ordinary income by up to $3,000 ($1,500 for those married filing separately)^[0]

This can be helpful in years when the stock market is down or volatile. Any additional losses can be carried forward to future years to offset capital gains of up to $3,000 ($1,500 for those married filing separately) of ordinary income per year.

• Dividends and capital gains on stock held inside a traditional IRA are tax-deferred, and tax-free if you have a Roth IRA. Dividends and capital gains on stocks in a regular brokerage account typically aren’t.

• Once the money is in your 401(k), and as long as the money remains in the account, you pay no taxes on investment growth, interest, dividends or earnings. A Roth 401(k) has similar benefits as a Roth IRA: your investments grow tax-free and your money comes out tax-free in retirement.

• You can convert a traditional IRA into a Roth IRA so that withdrawals in retirement are tax-free. But note, only post-tax dollars get to go into Roth IRAs. So if you deducted traditional IRA contributions on your taxes and then decide to convert your traditional IRA to a Roth, you’ll need to pay taxes on the money you contributed, just like everyone else who invests in a Roth IRA.

• If you invest with a robo-advisor, many offer free tax-loss harvesting.