Income Tax Rate on Common Stock Gains
Your personal stock market strategy is to buy low and sell high -- and it is working. When you sell your common stock holdings for profits, you should understand how your profits will be taxed.
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Types
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When you sell a stock for a profit that income is classified as a capital gain by the IRS. You can also have capital losses. Capital gains and losses are accounted for and taxed differently on your tax return.
Time Frame
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Capital gains are either short term or long term. Short-term gains are for stocks that are held for up to one year. Long-term gains result from stock held for longer than a year before it is sold.
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Rates
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Short-term capital gains are taxed at the investor's marginal income tax rate, which can be up to 35% in 2008. Long-term gains are taxed at a lower rate. Investors in the 10% or 15% marginal income tax bracket pay 0% tax for 2008 through 2010. Investors in higher tax brackets will pay 15% on their long-term capital gains.
Considerations
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Short-term and long-term capital losses can be credited against short- and long-term capital gains, reducing the taxable income. You can deduct up to $3,000 in excess capital losses against other income.
Warning
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If you sell a stock for a loss then buy it back within 30 days, the IRS calls that a "wash sale" and will not allow the deduction of the capital loss from taxable income.
Planning
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Tax planning is an important part of the timing of your stock sales decision, but do not let taxes drive you to unnecessary losses. A loss is still a loss, even if you can deduct it.
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