How to Sell Stocks Without Paying Taxes
The stock market has been one of the most popular ways for investors to earn extra money. If you play your cards right and follow the state of the US stock market index, there is a chance you will get great returns on your investment.
Everyone has heard of the stock market and knows that if you learn how to make money in stocks, you’re in for a bright future. However, where there’s money, taxes follow soon after. If you’re wondering if there’s a way to sell shares of stock without paying taxes on stocks, you’ll be happy to know that the answer is yes.
Capital gains tax
Before getting into the details of how to sell stocks and not pay taxes, we first have to talk about taxes in general. The first type of tax you should know if you’re looking to sell stocks is the tax on capital gains.
When you make a profit from selling shares of stock, you receive something that is known as capital gain, and you need to pay capital gains taxes on this profit. You won’t have to pay taxes on capital gains until you sell the stock you own.
Tax on capital gains can be divided into two categories:
- Taxes on short-term capital gains. If you hold on to an asset (in this case, stocks) for a maximum of one year, you’ll pay short-term capital gains taxes on the profit you earn from selling the stock. The short-term capital gains rate is the same as your regular income tax rate.
- Taxes on long-term capital gains. If you hold on to your stocks for longer than one year, you will pay long-term capital gains taxes on your stock profits. The rates for the long-term capital gains tax rate depend on your filing status and taxable income. They can be 20%, 15%, or 0%.
Dividends tax
When companies pay out the income they earn to a shareholder of stock, this income is known as a dividend. Dividends are usually paid either monthly or quarterly and they can be paid in both cash and shares. They are taxable based on the type of dividend you’re receiving and your income level.
There are two types of dividends:
- Qualified. These dividends come from the investment income you’ve made in the U.S. or qualifying foreign companies. For a qualified dividend, you need to hold on to your dividends for at least 61 days or a holding period that lasts for 121 days. For this income, you will be taxed at the long-term capital gains rate.
- Non-qualified. Also known as ordinary dividends, non-qualified dividends include most dividends that are paid to the shareholders. They are taxed at the short-term capital gains rate.
Dividends can sometimes be hard to figure out, especially for people who aren’t sure about whether the ones they’re holding are qualified or non-qualified. This can get frustrating when it’s time to pay taxes on dividends.
Luckily, the IRS can help with that. If you earn $10 or more from your dividends or different investments, you will receive Form 1099-DIV which will report your dividends properly. This way, you won’t have to worry about making the distinction.
When do you pay taxes?
If you’re interested in how to sell stocks and not pay taxes, you need to be aware of one thing: when you make any sort of gain, it’s considered to be taxable income. You can’t expect to make a lot of money without paying any taxes.
If you’re new to the world of trading and are wondering how big of a tax bill you will receive next year, you need to educate yourself properly. The first thing you should know is where your capital losses and gains are reported in your brokerage account.
After you get that information, you need to make a rough assessment of how big your total adjusted gross income will be at the end of this year. It’s best to talk to a tax advisor or a financial advisor to ensure you understand this properly.
Let’s circle back to capital gains taxes. Depending on how long you’ve held the stocks and your overall annual income, the tax percentage can be anywhere between 0% and 37%.
If you’re paying long-term capital gains taxes, you can expect to pay less in taxes than you would if paying short-term capital gains taxes. The tax on long-term capital gains is between 0% and 20%.
However, if an investor has a lower income, they might not owe any taxes to the IRS. Single filers making less than $41,675 have a 0% long-term capital gains tax rate. Single filers earning between $41,675 and $459,750 have a 15% long-term capital gains tax rate. The long-term capital gains tax rate jumps to 20% for single filers making over $459,750.
One thing you need to remember is that your AGI will include all of the income you’ve made during the current year, not just your salary. This means that the gains you’ve made will most likely count towards your AGI and could lead to higher ordinary income tax rates.
How to sell stocks without paying taxes: 4 proven tips
For everyone who wants to know how to sell stocks without paying taxes, there are four proven methods, and you can opt for the one that suits you best.
Keep your earnings in the lower tax bracket
If you’re in the lower tax bracket or you’re already retired, you most likely don’t have to worry about capital gains taxes. Staying in the lower tax bracket also gives you additional tax deductions on things such as medical expenses and mortgage interest.
Donate or gift your stock
Are you someone who donates to charity? If you are, consider donating your stock directly. There’s no need to sell your business stock and donate the money because most charities will accept stocks. When you do this, you won’t have to pay any capital tax for the gains on stocks.
As an added bonus, when you donate to charity, you can write it off as a tax deduction and reduce your overall taxable income. This is a very popular strategy because it’s mutually beneficial and you can even make a larger donation without worrying about taxes.
If you want to take a different route, you can gift your stock to a family member who falls under the umbrella of the lower tax income bracket. As long as the tax is worth $15,000 or less when the person you gifted it sells it, they won’t have to worry about the capital gains tax.
However, tax laws regarding gifts often change. Just like it’s important to learn how to research stocks if you’re planning on being an investor, it’s also important to educate yourself on tax laws.
In case you plan to gift your stocks, make sure to know all the rules related to gift taxes. It’s much different to gift stocks to someone than it is to go through the sale of stocks.
Take advantage of tax-loss harvesting
Tax-loss harvesting is a technique during which an investor sells their stocks or any other securities they have. At the time of the sale, these securities are held in a taxable investment, and when they are sold, they are sold at a loss.
This may sound counter-productive, but tax losses can be very useful. One of the things you can do with them is offset the impact of capital gains when selling other stocks you have.
Excess losses, either short-term or long-term, are generally used to offset additional capital gains from other securities sold at a profit. And then, depending on how much your losses for the year exceed your gains, you may use a maximum of $3,000 to offset any other taxable income on your regular income tax returns.
If you have additional losses, you can carry them over to the next tax season and use them for your next year’s annual tax returns.
However, if you want to use this strategy, you need to make sure to avoid wash sales. According to the wash sale rule, you aren’t allowed to purchase sales of identical or substantially identical stocks for a period of time of 30 days before or within 30 days after you’ve sold stocks for a loss.
If you violate the wash rule, you won’t be able to use the tax loss against your capital gains that year.
Move to a state that is more tax-friendly
This may seem like a drastic move, but if you’re willing to relocate so you can avoid capital gains taxes, there are some states that are more tax-friendly than others. Two of those states include Florida and Nevada.
When you sell your stocks and are a resident of one of these states, you won’t have to pay a state capital gains tax. However, there isn’t a guarantee a state that’s currently tax-friendly won’t change its tax rules in the future, but it’s still a solution some people opt for.
Final thoughts
The federal tax code is very complex, but if you want to learn how to sell stocks and avoid taxes, you need to get acquainted with it or work with an advisor who is. The tips discussed here are legal, so it’s not tax evasion or anything similar.
Buying and selling stocks is a great way to create a long-term investment for your future, and if you know how to minimize the taxes you may be required to pay, that’s an even better deal.
