Trading stocks can be a great way to increase your net worth and add usable money to your bottom line each month. When traded correctly, cash in the stock market can undoubtedly outperform funds simply sitting in a bank account. However, the tax for trading stock needs to be managed to make sure you are prepared to pay applicable tax for trading stock. Here are some tips to help you prepare for, and possibly avoid, paying capital gains on stock sales.
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Tax Calculations on Stock Sales
Stock sales are generally categorized as short-term sales and long-term sales. Short-term sales are stocks that are sold within one year of purchase. The tax for trading stock that would be considered short-term is based on your marginal tax rate. Long-term stocks held for more than one year and then sold are taxed at the capital gains tax rate.
When Are Taxes Due?
Tax for a trading stock is paid when you file your income tax return every year. It is essential to work with a tax preparation company versed in stock sales and tax calculations. Not only will they be able to calculate how much tax on selling stock you will have in that particular year, but they may also be able to help you find ways to avoid excessive taxation on future stock sales.
If you would prefer to pay your tax bill early, your tax preparer can let you know how much tax on selling stock you owe up until a particular period, and you can make an estimated payment before you file taxes. In turn, this will lessen the amount you owe at the end of the year.
Short Selling Stock
For some, short-selling stock is a method of making money in the stock market that differs from traditional stock trading. The short-selling stock method works by the investor making a profit when a stock falls in price. Investors don’t purchase the stock they are selling; instead, they borrow the stock from their broker and sell it when its prices fall.
While this is a risky method of stock trading, it can be profitable. It certainly is complex. Taxation on profits from short-selling stock is classified the same way as traditional stock sales. However, it may be more challenging to determine the basis of sales.
How to Avoid Taxes on Stocks
One great way to lessen your tax for trading stock sales is to pay attention to your tax bracket. If you have made more money in a particular tax year, and you still have stocks to sell, it could be a good idea to defer the sale of those additional stocks to the following year when your tax bracket would not be as high.
Tax-loss harvesting is another way to answer the question of how to avoid taxes on stocks. Simply put, you sell stock at a loss to offset your gain. Long-term losses help to offset long-term gains and the same with short-term sales. Any losses that exceed gains will be deducted at $3,000 a year until the losses are completely used.
It is important to note that you cannot sell a stock and buy the same stock within 30 days before or after the sale. For example, if you sell Apple stock for a loss to offset a gain, you could not have purchased Apple stock 30 days before the sale, and you cannot buy Apple stock for 30 days after the sale. If you do, you will negate your losses. When managed correctly, this is an excellent way of learning how to avoid taxes on stocks.
At Fusion CPA, we understand how to make stock sales a part of your overall financial planning, and we will work hard to make sure your tax liability is managed. We are available to answer any specific questions you may have to help you be successful in your stock sales tax strategies and learn how to avoid taxes on stocks.
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This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.