Investing in the stock market can be a great way to earn and build financial stability. It’s important, however, to also consider the tax liabilities so you can estimate just how much profit you will make when buying and selling stocks. Use these top nine ways to avoid capital gains tax on stocks so you can keep more of your hard-earned money.
Who Pays Capital Gains Tax on Stocks?
Anyone who buys and sells stocks is subject to a capital gains tax of up to 37%. Your specific tax rate depends on your income, marital status, profit earned, tax filing status, and how long you own the stock before selling. Any profits earned plus dividends are subject to capital gains tax. Stocks you hold for less than a year are usually subject to a higher tax bracket than long-term investments.
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Top 9 Ways to Avoid Capital Gains Tax on Stocks
These top nine ways to avoid capital gains tax on stocks help you keep more profit in your pockets:
1. Invest Long Term
Because you pay more for short-term capital gains, holding on to your stocks a little longer could pay off. Some people even pay 0% on long-term capital gains (if they earn less than $40,400 in 2022). Short-term capital gains tax rates are anywhere from 10% to 37%, whereas long-term capital gains tax rates range from 0% to 20%.
2. Add to Your Retirement Funds
Investing in your retirement can also help you avoid expensive capital gains taxes. Use a Roth account to buy and sell stocks and bonds without capital gains tax liabilities. If you invest in a traditional IRA account, you can defer the taxes until retirement. If you opt for a Roth IRA, you can withdraw your funds tax-free under certain circumstances.
3. Be Strategic About Withdrawals
You don’t owe taxes until you cash out your stock assets. Being strategic about withdrawals, also known as tax-loss harvesting, can help you minimize or avoid capital gains taxes.
You might be able to sell certain shares at a loss to put you in a position to avoid capital gains on other, more profitable stocks. Timing when you sell your assets, including spreading a sale over multiple tax years, can also help you combat high taxes.
4. Sell Inherited Assets
If you inherit assets from a family member, you won’t have to pay capital gains until they appreciate. As long as you sell the inherited assets immediately, you can avoid paying taxes on them. This is referred to as the stepped-up basis, a tax policy that benefits the trustee.
5. Take Advantage of Tax-Free States
All states are subject to federal capital gains taxes. However, you can reduce your state tax liabilities if you live in a tax-free state. Nine U.S. states don’t charge state tax on capital gains.
6. Donate Assets
Donating profitable assets to a charitable organization helps you avoid capital gains tax while also benefiting a charity. You don’t have to pay capital gains on the assets you donate, plus you can use the donation as a tax deduction based on the stock’s current value rather than the price paid.
7. Invest in Small Business
The IRS offers tax incentives to those who invest in small businesses. As long as you invest in a qualified small business, you can exclude up to $10 million in capital gains from your income.
8. Gift Your Stocks
Looking for a perfect graduation or wedding gift? The government allows you to gift up to $15,000 worth of stocks to family, as long as they’re in a lower income tax bracket. However, the laws on gifting assets change frequently, so do your research first.
9. Invest in Opportunity
Investing in an opportunity zone can reduce how much you owe in capital gains tax and defer your amount owed. Depending on how much you invest and for how long, you might be exempt from all your capital gains tax. You might also be eligible to roll existing capital gains into opportunity zone investments.
Frequently Asked Questions on Avoiding Capital Gains Tax
How Can I Avoid Paying Capital Gains Tax by Reinvesting?
You might be eligible to avoid capital gains tax by reinvesting in a tax-advantaged account or opportunity zone.
Do I Pay Capital Gains if I Reinvest the Proceeds From a Sale?
Unlike real estate capital gains tax, you can’t avoid paying taxes by reinvesting the proceeds from the sale of stock.
At What Income Level Do You Not Pay Capital Gains Tax?
For the 2022 tax year, investors are exempt from paying capital gains tax if they make $41,675 per year or less. If you make anywhere between $41,676 and $459,750 per year, you’re subject to a 15% capital gains tax rate. You’re subject to a 20% capital gains tax if your income is more than $459,751 per year.
Do I Pay Taxes on Stocks I Don’t Sell?
You don’t pay anything until you sell your stocks. Even if you own stocks that appreciate in value, you don’t owe capital gains for as long as you hold on to the assets.
What Is the Difference Between Short- and Long-Term Capital Gain Taxes?
Short- and long-term capital gain taxes describe how much you pay based on how long you hold the stock. A short-term capital gain tax is a fee you pay for any assets you hold for less than a year. A long-term capital gain is a fee you pay for assets held for longer than a year. Short-term capital gains taxes on stocks are typically higher than long-term capital gains taxes.
Which States Don’t Charge Capital Gains Taxes?
Nine U.S. states don’t charge capital gains taxes: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Your tax liabilities differ as much as your stock strategy. That’s why you need expert information on stock trading tailored to you and your financial goals. You might already be eligible for tax exemptions. If not, you can take steps now to limit how much you owe in taxes on your stocks and other assets.