Buying securities (shares of a public company’s stock, mutual fund, ETF, etc.) is one of the most common ways to invest your money. Although it’s easy to set up a brokerage account and start investing, it takes a little more planning to figure out the best time to sell.
Types of Capital Gain or Loss
Selling a security creates what is called a capital gain or loss. There are four categories into which a sale of securities falls for tax purposes:
- Short-term capital gain – Securities sold within one year of the date of purchase where the amount you sold the securities for (sales proceeds) are greater than what it cost you to buy the securities on the date of purchase (cost basis).
- Short-term capital loss – Securities sold within one year of the date of purchase where the sales proceeds are less than the cost basis.
- Long-term capital gain – Securities sold more than one year from the date of purchase where the sales proceeds are greater than the cost basis.
- Long-term capital loss – Securities sold more than one year from the date of purchase where the sales proceeds are less than the cost basis.
Tax Treatment
It may not seem like much of a difference based on the categories above, but the tax treatment of them is very different.
- Short-term capital gain – Taxed at your ordinary income rates. Click here to view current tax brackets.
- Short-term capital loss – Can offset both short- and long-term capital gains. If losses exceed gains, you can deduct them up to $3,000 per year (the remainder will be carried over to following years).
- Long-term capital gain – Taxed at a favorable tax rate (0%, 15%, or 20%, depending on your tax bracket).
- Long-term capital loss – Can offset both short- and long-term capital gains. If losses exceed gains, you can deduct them up to $3,000 per year (the remainder will be carried over to following years).
Strategies
Keep in mind that, when it comes to securities, tax strategies can differ greatly from investing strategies. Believe it or not, I am not an expert investor and, while it may not get as many clicks, this is not my attempt at a “Make a Million Dollars Selling Stock and Pay No Tax!” blog; these are simple strategies based strictly on tax advantages.
- Wait until after a year to sell – If you’re considering selling at a gain, hold off, if you can, until after a year from the date of purchase. The favorable long-term capital gains rates are lower than your ordinary tax rate and will save you some dough.
- Buy low, sell…lower (see? I bet your investment advisor wouldn’t tell you to do that) – If you’ve already sold securities at a gain this year, consider harvesting your losses by selling some securities at a loss (depending on your tax bracket) to lower or eliminate the taxable gain for the year.
- Avoid the “wash sale” rule – if you sell a security at a loss 30 days after purchasing it or purchase the same or “substantially identical” security 30 days after selling it at a loss, the loss will not be allowed on your current year’s income tax return.
If you’re in a high tax bracket or are a day trader (considered a “trader” as opposed to an “investor”), the strategies and tax rules become a bit more complex. Either way, we encourage dialogue from traders and investors alike, so feel free to contact us if you have any questions.
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Aiola CPA, PLLC is a 100% virtual CPA firm, specializing in tax planning and preparation for real estate investors. See more at www.aiolacpa.com
