Investing in the stock market is about making money, and the only way you can get your money back is by selling shares or receiving dividends. However, income taxes eat up part of your profits, so it’s important to know how your gains will be taxed, and if any penalties will apply. When you file taxes after selling stock you’ve owned for one year or less, you won’t see a line item for a tax penalty on your tax return. But, you could end up paying more than if you had held the stock for over a year.
Calculating Capital Gains
When you sell capital assets, including shares of stock, you don’t pay taxes on the entire amount you receive from the sale. Instead, you only pay taxes on the portion of the proceeds that represents your gains. To calculate your gains, subtract what you paid to acquire the shares including any transaction fees from what you received in the sale after accounting for any fees. For example, if you bought $1,000 worth of stock and paid a $10 trading fee, then sold the stock for $1,320, but paid another $10 fee, your gains would be $300.
Capital gains on assets you’ve owned for one year or less are classified as short-term capital gains, while gains on assets you’ve owned for more than one year are classified as long-term capital gains.
Taxation of Short-Term Capital Gains
Short-term capital gains are taxed as ordinary income, and as of 2019, those rates can rise as high as 37 percent. The actual tax rate you pay on your short-term capital gains depends on your total taxable income and your filing status; the higher your taxable income, the higher your tax bracket. However, there is no additional penalty levied on profits from selling stocks within one year of buying them.
Taxation of Long-Term Capital Gains
Long-term capital gains are taxed at lower tax rates than short-term gains, but the rates depend on your income. You don’t pay any income taxes on long-term capital gains: if you’re married and filing jointly and your taxable income falls below $78,750, head of the household with taxable income below $52,750 or single or married filing separately with taxable income below $39,375. Your long-term capital gains are taxed at 15 percent if your taxable income exceeds these thresholds but falls below $488,850 if married and filing jointly, $461,7 if the head of household, $434,551 if single or $244,425 if married and filing separately. Any long-term capital gains above these thresholds are taxed at 20 percent.
Therefore, while there isn’t technically a penalty for selling stocks within one year, you will be rewarded come tax time with lower rates for sales of stocks you’ve owned for more than one year.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."