Paying taxes on your investments
Learn how capital gains taxes work and why holding onto an investment for more than a year could lower your tax bill.
February 17, 2022
One important factor to consider before selling an investment is the impact of taxes.
What do I pay taxes on?
If you sell an investment for more than you bought it, you’ll pay taxes on the amount you made. This type of tax is called “capital gains” tax.
Let’s step through a hypothetical example. Say you originally bought a share of stock for $20 and later sold it for $30. You’d pay taxes on the $10 you made. That $10 is your “capital gain.” 1
How much do I pay?
The amount you pay in taxes depends on how long you owned an investment.
In most cases, you may pay higher taxes if you hold an investment for a year or less. This is something to keep in mind if you plan on trading often.
Short-term capital gains tax
If you own an investment for a year or less, you typically pay taxes on “short-term” capital gains—the same tax rate as your ordinary income.
For example, if you’re single and your taxable income falls between $41,776 and $89,075, your ordinary income tax rate is 22% (based on 2022 tax rates).
That means you’d also pay 22% on the amount of money you earned from selling your investment.2
So 22% of your $10 in profit is $2.20. That’s how much you have to pay in tax on the stock you sold.
Long-term capital gains tax
If you own an investment for more than a year, you typically pay taxes on “long-term” capital gains—a rate of 0%, 15%, or 20%.
So if you’re single and your taxable income falls between $41,676 and $459,750, your long term capital gains rate is 15%.
Anything less, it’s 0%, and anything more, it’s 20%.2
Using our example numbers above, you’d only pay 15% on your $10 in profit, which is $1.50.
State capital gains tax
Many states also tax capital gains tax on top of the federal taxes discussed above, so it’s a good idea to research your state’s rates specifically.
States that don’t charge capital gains tax are Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
What if I haven’t sold any investments yet?
You may still have to pay taxes on interest you earned and dividends you received throughout the year, even if you haven’t made any money by selling an investment yet. And states that don’t tax capital gains may still tax interest and dividends, so be sure to learn about your state’s laws.
Talk to a tax professional
If you have questions about your specific tax situation, it’s helpful to talk to a tax pro to get individualized advice. You may find this especially helpful when it comes time to file your taxes.
This year’s tax filing deadline for most Americans is April 18, 2022.