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Taxes on Stocks: Understanding What to Pay

Taxes on Stocks

Congratulations, you’ve started your investing journey and are beginning to build wealth for yourself or perhaps your family. Stocks can be a profitable, long-term wealth generator that puts more money in your pocket come retirement time or earlier. However, when you sell those stocks for a profit, your tax bill is going to change quite a bit. Here’s what you need to know about taxes on stocks. 

Profits on stocks are usually taxed at different rates depending on how long you held the stock. If you hold the stock for more than a year before selling it, then your profit could be taxed at 20%, 15%, or even 0%. However, if you hold the shares for less than a year and then sell at a profit, you may be taxed at your usual tax rate for that money. Dividends paid by the company to shareholders are also taxable, but there are exceptions to this rule. 

You probably researched your broker and made sure that online payment was available for stock holding. The fees and commissions work for you, and so does your trading platform. It’s time to lower the taxes on your portfolio now. 

Everyone wants to grow their wealth, and investing is a great way to do it. If you’d like to continue growing your retirement fund, an education savings account, or even just to make a little extra money, lowering your taxes on the profits from your stocks is critical.

What Taxes Apply to Stock Investments?

Here’s our guide to what you will get taxed in the stock market and how to lower your bill.

Taxes on Capital Gains

Standard brokerage accounts pay capital gains taxes on the profits from shares bought and sold. As mentioned above, the tax rate on those profits will differ depending on the timeframe in which you held those shares. Capital gains taxes apply to the sale of an asset for more than what was paid.

Short Term

In the short term, meaning less than a year, selling stocks for a profit will trigger a tax rate that is equal to your tax bracket. This could be quite high depending on your tax bracket, which is why you should consult a tax professional if you are unsure of what bracket you are in. 

Long Term

Assets sold after a year of holding them will trigger a different capital gains tax rate. Rates vary from 0% to 15% up to 20% depending on your tax bracket (taxable income) and filing status (single, married, common law). 

As you can see, holding stocks for more than a year is not only a generally advisable investment strategy, but is also preferable for lowering your capital gains rate.


Dividends are quarterly payments made by companies to shareholders in the case of excess profits. These can be a great way to boost your stock returns as you continue to earn money every three months if the company you invested in is doing well. 


The first of two types of dividends, nonqualified dividends are also referred to as ordinary dividends. These are taxed at the same rate as your normal tax bracket, like profits on shares held for under a year. 


Qualified dividends are taxed in a similar fashion to profits earned on shares held for more than a year at a rate of 0%, 15%, or 20%. Again, this is dependent on a variety of factors, including your filing status and income. 

Higher and Lower Rate Scenarios

No matter if it is a profit from selling an asset or a dividend received (qualified or nonqualified), the higher your tax bracket, the more you will pay on your investments. The capital gains tax may also change from time to time as governments shift tax laws and rewrite the tax brackets. 

Lower Your Bill

Everyone wants to lower their tax bill, and if you can pay a little less on your capital gains tax, why not? There are a couple of things you might want to try to lower your capital gains tax rate and keep more of your profits and dividends.

Increase Your Holding Period

Instead of selling your shares after a short period, hold on to them for more than a year. Capital gains tax rates will be higher for shares held less than a year, so simply holding them longer will save you money come tax seasons. The same rules apply to dividends. If you hold the shares long enough, dividends can count as qualified. Those qualified dividend payments are taxed at a lower rate than regular income, sometimes even 0%, and this adds up to significant savings. 

Losses Help Reduce Taxable Gains

The taxable amount on stocks and other assets sold for a profit can be reduced by using capital losses to offset the amount. When you lose money on an investment, it is counted toward a total called your “net capital gain.” This total is the difference between your capital gains and your capital losses. The final tally is the taxable amount for which you will need to pay capital gains tax. Unfortunately, in some cases your losses may exceed your gains. This difference can then be deducted from your total tax return, usually up to $3,000 per year or for half that amount if you file separately though your status is that of a married couple. 

Account Type

There are other accounts that will bring down the tax rate of your profits from stocks, in some cases, to 0%. An IRA< 401(k) or a tax-free or tax-advantaged account can help bring down your capital gains tax bill. These accounts are popular alternatives to a regular brokerage account and are often used to build wealth over the long term while saving for retirement or other long-term goals.

Traditional IRA

A traditional IRA will allow you to defer taxes, and a Roth IRA will be completely tax-free. 


401(k) accounts allow you to pay 0% in taxes on investments, including dividends and capital gains, so long as the money stays in the account. 

Roth IRA Conversion

This is one of the most popular investment accounts for retirement savings. Converting a traditional IRA to become a Roth IRA means that all withdrawals while retired are tax-free. Some caveats do apply, though, as post-tax dollars can be deposited into a Roth IRA while pre-tax dollars cannot. 

No matter your investment vehicle of choice or the timeframe for buying and selling shares, lowering your capital gains tax rate is a great way to put more money into your pocket. It is important to keep up to date on capital gains rates as well as the account options available to help lower your tax rates and build wealth faster.

Featured Image: Twenty20

About the author: Matthew is a financial writer, essayist, and editor of several publications. He writes books for fun and travels as a challenge to see every country.

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