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Stocks and taxes

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Anonymous
Not applicable

Stocks and taxes

Do you pay taxes each year on stocks as they increase in value or only for the year you sell them? In other words, if I’m not selling them, do I not pay?
Message 1 of 20
19 REPLIES 19
Anonymous
Not applicable

Re: Stocks and taxes

If the stocks are in a tax sheltered vehicle (IRA, 401k, etc.) you do not pay annual taxes on them.

 

So I'll assume that you have them in a taxable account.

 

Stocks (including mutual funds with stock components, etc.) generate taxable income each year.  Some generate very little such income, and their value is chiefly in the hope that they will increase in value over time.  Others generate much more taxable income.

 

Therefore you almost always pay some taxes each year, though possibly very little.  The kinds of funds that should be in a taxable account should tend to be funds on which you are paying very little taxes each year.  REITs are an example of a fund that generates a lot of taxable income -- there are many others.

 

You will also pay capital gains taxes when you sell the stocks.  You do not pay capital gains taxes each year but only after you sell them.

Message 2 of 20
wasCB14
Super Contributor

Re: Stocks and taxes

CGID is right, but there can be a few exceptions:

-Mark-to-market accounting (not relevant for you...traders have to go out of their way to elect this tax treatment).

-Pass-through entities can generate income on which investors must pay tax, even if no cash is distributed. These companies generally have "LP" "Partners" or "LLC" in the name. The pass-through entity would likely send you a form called a K-1 that tells you the amount of income you have to pay tax on.

-Certain mergers and reorganizations. Say you own stock in Company A, and Company B buys A using shares of B (as opposed to all cash). You may not have gotten cash or gone out of your way to do anything, but in certain circumstances it may be treated as a sale.

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Message 3 of 20
iced
Valued Contributor

Re: Stocks and taxes


@Anonymous wrote:
Do you pay taxes each year on stocks as they increase in value or only for the year you sell them? In other words, if I’m not selling them, do I not pay?

Until you sell them, you don't realize any gains, and therefore you don't pay any taxes. Be aware that any dividends paid out are subject to tax, though.

Message 4 of 20
Anonymous
Not applicable

Re: Stocks and taxes


@Anonymous wrote:
Do you pay taxes each year on stocks as they increase in value or only for the year you sell them? In other words, if I’m not selling them, do I not pay?

I'm curious... have you inherited a bunch of money (whether in cash or in stocks themselves)?  Or is your disposable income so high that you wish to invest more than 25k annually?  If the answer is no (as it is for almost all people) then the question may have no practical impact for you.  Using the tax-sheltered device of a 401k plus an IRA will give you all you need.  If are over 50 you are entitled to save even more.

 

It's still a good question of course.

Message 5 of 20
bada_bing
Frequent Contributor

Re: Stocks and taxes

Do you prepare your own tax returns ? Using one of the common software packages like TurboTax or H&R Block ? If you do, and you keep your investments at one of the bigger brokerages like Fidelity, Schwab or Vanguard, the tax preparation software you use has the ability to log into your investment accounts and download the year's activity. There is nothing daunting about compliance with investment taxes. For a typical individual investor it takes only 30 secs to log the software in and grab the data. The software wil enter the data into the proper spots on the digital tax forms. The amount of tax on a typical individual investors taxable holdings is small. 

 

I'd urge anyone to get started with investing. Time is the most valuable component in successful investing. The sooner you start, the better you'll do. Albert Einstein called compounding the 8th worder of the world.

 

I'd also urge anyone to do their own taxes, using one of the common tax prep software offerings. Taxes are a hassle, but the small amount of time doing them yourself is well worth it for the experience. Probably the most important component of managing individual finance is having a basic understanding of what's going on with your taxes.

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Message 6 of 20
iced
Valued Contributor

Re: Stocks and taxes


@Anonymous wrote:

@Anonymous wrote:
Do you pay taxes each year on stocks as they increase in value or only for the year you sell them? In other words, if I’m not selling them, do I not pay?

I'm curious... have you inherited a bunch of money (whether in cash or in stocks themselves)?  Or is your disposable income so high that you wish to invest more than 25k annually?  If the answer is no (as it is for almost all people) then the question may have no practical impact for you.  Using the tax-sheltered device of a 401k plus an IRA will give you all you need.  If are over 50 you are entitled to save even more.

 

It's still a good question of course.


There are many reasons besides income someone would be buying stocks outside of tax-sheltered RAs, such as ESPP.

 

As an aside, I'm a bit flattered that you would think my disposable income is so high since I invest well above 25k annually, but I can assure you I'm not a 1%-er or even a 10%-er. I'm pretty close to the average income for my zip code, and I'm not unique among my friend circle in this regard. There's plenty of savers out there, including most of the FIRE crowd.

Message 7 of 20
Anonymous
Not applicable

Re: Stocks and taxes


@iced wrote:

@Anonymous wrote:

@Anonymous wrote:
Do you pay taxes each year on stocks as they increase in value or only for the year you sell them? In other words, if I’m not selling them, do I not pay?

I'm curious... have you inherited a bunch of money (whether in cash or in stocks themselves)?  Or is your disposable income so high that you wish to invest more than 25k annually?  If the answer is no (as it is for almost all people) then the question may have no practical impact for you.  Using the tax-sheltered device of a 401k plus an IRA will give you all you need.  If are over 50 you are entitled to save even more.

 

It's still a good question of course.


There are many reasons besides income someone would be buying stocks outside of tax-sheltered RAs, such as ESPP.

 

As an aside, I'm a bit flattered that you would think my disposable income is so high since I invest well above 25k annually, but I can assure you I'm not a 1%-er or even a 10%-er. I'm pretty close to the average income for my zip code, and I'm not unique among my friend circle in this regard. There's plenty of savers out there, including most of the FIRE crowd.


Hello Iced!  Perhaps my use of the word "so" misled you.  My fault -- sorry about that.  I meant it in the sense of "sufficiently."  Your disposable income is indeed sufficiently high that you can invest over 25k -- if you are in fact doing that.

 

For most people their disposable income is not sufficiently high to do that.  I think that's pretty incontrovertble.  Housing, food, medical bills, cost of raising children, auto/transportation, student loan payments or other debt payoff, etc. eats up enough of their money that they don't have more than 25k additionally to put toward retirement.

 

Now if you want to suggest that some people (not all but some) could sharply increase the amount of their disposable income by spending less, I am certainly with you on that. 

 

There are certainly "many" people out there who are putting more than 25k annually into stocks, bonds, and so on.  I would not be surprised to learn, for example, that there are hundreds of thousands of people doing that.  But that's still a very small percentage of the adults in the US (which is over 250 million).

Message 8 of 20
Save-n-Invest
Established Contributor

Re: Stocks and taxes


@Anonymous wrote:
Do you pay taxes each year on stocks as they increase in value or only for the year you sell them? In other words, if I’m not selling them, do I not pay?

 

If you hold individual stocks there is no taxable event until the stock is sold. Dividends are taxed in the year they are paid. Capital gains rates apply to dividends. When you sell the stocks profit or loss is determined at that point. Profit from stocks is taxed at capital gaines rates. This is for stocks held in a non-qualified account.

 

If you are refering to a mutual fund you will receive 1099 each year for tax reporting.  

 

Investments held in qualified accounts are taxable in the year the distribution is made. Distributions are taxed at regular income rates.   

 

Roth distributions are not a taxable event. 

 

Capital gaines rates are usually more favorable than regular (earned) income tax rates. 

 

A new tax law went into effect January 1, 2018. The personal exemption was eliminated, SALT is capped at 10k, miscellaneous deductions above 2% floor are eliminated. That includes unreimbursed employment expenses. Tax brackets are changed. Tax brackets are now indexed to the chained CPI. Welcome back bracket creep!

 

Be mindful of the tax torpedo. We are often told that our income tax rate will be lower in retirement. Don't count on it. Deferral of income tax is just that. Pay later but you may pay more. 

 

 


 

Message 9 of 20
Anonymous
Not applicable

Re: Stocks and taxes


@Save-n-Invest wrote:

 

We are often told that our income tax rate will be lower in retirement. Don't count on it. Deferral of income tax is just that. Pay later but you may pay more.


Great point.  2018 federal income tax rates are (viewed historically) at stunningly low levels.  (E.g. in 1960 the top income tax bracket was 91%.  This was at the end of the very conservative 1950s.)

 

In the future we will have to pay for two huge now-ticking time bombs: climate change costs and the costs of an aging population (Social Security and health costs).  I don't even wanna think about it -- but I do realize it could easily affect taxes.

 

There's of course a few other costs that we are deferring to the future: military adventures (e.g. Iraq) and slashing low income taxes yet further.  I am a political centrist that leans toward fiscal conservatism (certainly not a left-wing guy) and am not mentioning these things to talk about politics.  Just observing that Save-n-Invest made a sound point and mentioning a few reasons why.

Message 10 of 20
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