Tax Tips

Stock Sales And Your Tax Liability

5 Minutes
March 11, 2022

All of you newbie stock traders may want to pay attention! We’re covering stock sales and your tax liability that goes along with it.

Let’s talk about what happens when you sell or even trade a stock… tax-wise.

GAIN OR LOSS

If your total stock sales for the year resulted in a capital net gain, then this may increase your tax liability.

The net gain may either follow the capital gains tax rates or the ordinary income tax rates, depending on if it’s a short-term or long-term gain.

We will go over that here in a minute!

If your total stock sales for the year resulted in a capital net loss, then you may be able to use this loss to reduce your income for the year.

For capital losses, you can claim the lesser of $3,000 or your total net loss for the year ($1,500 if married filing separately). If your loss exceeds $3,000 ($1,500 if MFS) then you can carry the loss forward to future tax years.

Here’s how to tell if your stock trading for the year resulted in a net gain or a net loss –

Grab your annual tax statement from the brokerage company you trade with. On the summary page, you should see a section titled “Summary of Proceeds, Gains & Losses, Adjustments and Withholding”. Then you’ll see a summary that looks something like this below.

In the far-right column, you will have either your gain or loss. In this example, the net gain is $3,000.

TERM	FORM 8949 TYPE	PROCEEDS	COST BASIS	MARKET DISCOUNT	WASH SALE LOSS DISALLOWED	NET GAIN OR LOSS(-)
Short	A, B, or C	$4,000	$6,000	–	–	($2,000)
Long	D, E, or F	$6,000	$1,000			$5,000
Undetermined	B or E, C or F	–	–	–	–	–
	Grand Total	$10,000	$7,000	–	–	$3,000

SHORT-TERM VS. LONG-TERM STOCK SALES

Now, in the term column, you’ll see that the brokerage statement separates your short-term sales and your long-term sales.

There’s a huge reason for this.

Any short-term gains are taxed at the same rate as your ordinary income. Therefore, your short-term gain tax rate follows your income tax bracket. See the Ordinary Income Tax Bracket chart below.

Ordinary Income Tax Bracket (2021):

Ordinary Income Tax Rate	Taxable Income, Single	Taxable Income, Married Filing Separately	Taxable Income, Head of Household	Taxable Income, Married Filing Jointly
10%	$0 to $9,950	$0 to $9,950	$0 to $14,200	$0 to $19,900
12%	$9,951 to $40,525	$9,951 to $40,525	$14,201 to $54,200	$19,901 to $81,050
22%	$40,526 to $86,375	$40,526 to $86,375	$54,201 to $86,350	$81,051 to $172,750
24%	$86,376 to $164,925	$86,376 to $164,925	$86,351 to $164,900	$172,751 to $329,850
32%	$164,926 to $209,425	$164,926 to $209,425	$164,901 to $209,400	$329,851 to $418,850
35%	$209,426 to $523,600	$209,426 to $314,150	$209,401 to $523,600	$418,851 to $628,300
37%	$523,601 or more	$314,151 or more	$523,601 or more	$628,301 or more

Short-term is when you own the stock for a year or less.

Now, long-term is when you own the stock for longer than one year. And this is where capital gains tax kicks in.

CAPITAL GAINS TAX

Long-term capital gains have their own tax brackets. Take a look –

Long-Term Capital Gain Tax Bracket (2021):

Capital Gains Tax Rate	Taxable Income, Single	Taxable Income, Married Filing Separately	Taxable Income, Head of Household	Taxable Income, Married Filing Jointly
0%	Up to $40,400	Up to $40,400	Up to $54,100	Up to $80,800
15%	$40,401 to $445,850	$40,401 to $250,800	$54,101 to $473,750	$80,801 to $501,600
20%	$445,851 or more	$250,801 or more	$473,751 or more	$501,601 or more

So basically, if your taxable income is less than $40,400 as a single taxpayer or $80,800 as a MFJ taxpayer then you will pay 0% tax on your capital gains!

This is very important to know because you can have some major tax savings by being strategic in your stock trading.

Even if you are in the 15% or 20% tax brackets for capital gains, you are still taking advantage of major tax savings if you compare the capital gains tax brackets to the ordinary income tax brackets.

Being aware of the tax implications in your stock trading can help you make better trading decisions and reduce the risk of a shocking tax bill!

Because let me tell ya, day traders usually have a major eye-opening when it comes to filing their taxes – since those stocks are typically short-term sales!

Weighing the risk and reward of your trading will make you a well-educated trader, and better yet, a successful one! Follow along for more tax tips this tax season!