When You Owe Taxes on Stocks and How Much
You pay taxes on stocks when you sell them for a profit or receive dividends, but not simply for owning them
The tax you owe depends on two things: whether you made money when you sold, and how long you held the stock before selling. If a stock goes up in value and you sell it, that gain is taxable income. If you hold it and never sell, there is no tax on the gain yet — you only owe tax when you actually sell. Dividends (payments some companies make to shareholders) are also taxable in the year you receive them, whether or not you sell the stock.
The amount you owe also depends on how long you owned the stock. Stocks you hold for more than one year before selling get taxed at lower rates than stocks you sell within a year. This difference can be substantial — the difference between your regular income tax rate and a lower "long-term capital gains" rate.
Key Takeaways
- You owe tax on the profit when you sell a stock, but not on the value increase while you still own it.
- Stocks held for more than one year are taxed at long-term capital gains rates, which are lower than the rates for stocks held one year or less.
- Dividends are taxable in the year you receive them, even if you do not sell the stock.
- Your brokerage sends you a tax form (Form 1099-B for sales, Form 1099-DIV for dividends) that you use to report these on your tax return.
How capital gains taxes work
A capital gain is the profit you make when you sell a stock for more than you paid for it. If you bought 100 shares at $50 per share ($5,000 total) and sold them at $75 per share ($7,500 total), your capital gain is $2,500. That $2,500 is taxable income.
The tax rate on that gain depends on how long you owned the stock. If you held it for one year or less, it is taxed as a short-term capital gain at your ordinary income tax rate — the same rate that applies to your salary or wages. If you held it for more than one year, it is taxed as a long-term capital gain at a lower rate. Long-term capital gains rates are 0%, 15%, or 20% depending on your total income for the year, while short-term rates can be as high as 37%.
A capital loss works the opposite way. If you sell a stock for less than you paid, you have a loss. You can use losses to reduce your taxable gains. If your losses exceed your gains in a year, you can deduct up to $3,000 of the excess loss against other income, and carry any remaining losses forward to future years.
Dividend taxes and how they are reported
Many stocks pay dividends — regular cash payments to shareholders, usually quarterly. These dividends are taxable income in the year you receive them. Like capital gains, dividends can be taxed at different rates depending on whether they are "may have access to" or "nonqualified."
may have access to dividends are taxed at the same long-term capital gains rates (0%, 15%, or 20%). To may have access to, you must have owned the stock for more than 60 days during a 121-day window around the dividend payment date. Most dividends from U.S. companies meet this test. Nonqualified dividends are taxed at your ordinary income tax rate, just like short-term capital gains.
Your brokerage will send you a Form 1099-DIV in January showing all dividends you received during the previous year. You report this on your tax return when you file.
What your brokerage reports to the IRS
When you sell a stock, your brokerage automatically tracks the sale and reports it to the IRS on Form 1099-B. This form shows the date you sold, the number of shares, the sale price, and your proceeds. The brokerage also reports your cost basis — what you originally paid — if they have that information.
For dividends, you receive Form 1099-DIV showing the total amount paid to you during the year, broken down by type (may have access to dividends, nonqualified dividends, capital gain distributions, and others).
You use these forms to fill out Schedule D (for capital gains and losses) and Schedule 1 (for dividend income) when you file your tax return. The IRS receives a copy of these forms from your brokerage, so your return must match what they reported or you may face questions.
Holding periods and tax rates
The difference between short-term and long-term tax rates can be significant. Suppose you have $10,000 in capital gains and your ordinary income tax rate is 24%. If those gains are short-term, you owe $2,400 in tax. If they are long-term and you fall into the 15% long-term rate bracket, you owe $1,500 — a $900 difference on the same profit.
The holding period is measured from the date you buy to the date you sell. If you buy on June 15 and sell on June 16 of the following year, you have held it for more than one year and may have access to for long-term rates. If you sell on June 14, it is short-term. Some investors time their sales to cross the one-year mark for this reason.
This does not mean you should hold a losing stock just to reach long-term status. If a stock is falling and you believe it will continue to fall, selling it as a short-term loss may be better than holding it longer and losing more money.
Tax-loss harvesting and offsetting gains
Tax-loss harvesting is a strategy where you sell stocks at a loss to offset gains elsewhere in your portfolio. If you have $5,000 in gains from one stock and $3,000 in losses from another, you can sell both and report a net gain of $2,000, reducing your tax bill.
You can also use losses to reduce other income. If your total losses exceed your gains by $2,000, you can deduct $2,000 against your salary, interest income, or other ordinary income. Any losses beyond $3,000 in a single year carry forward to future years with no time limit.
One rule to watch: the wash-sale rule. If you sell a stock at a loss and buy the same stock (or a substantially identical one) within 30 days before or after the sale, the IRS disallows the loss. The loss is added to the cost basis of the new purchase instead. This rule prevents you from selling a stock for a tax loss and immediately buying it back.
State and local taxes on stocks
Federal capital gains tax is only part of the picture. Some states also tax capital gains. New York, for example, taxes long-term capital gains as ordinary income. California does the same. Other states, like Texas and Florida, have no state income tax at all.
A few states tax only long-term capital gains at a special rate. Washington State, for instance, taxes long-term capital gains above a certain threshold at a flat rate separate from income tax. The rules vary significantly by state, so check your state's tax authority website or speak with a tax professional if you live in a state with income tax.
Some cities also impose local income taxes that apply to capital gains. New York City, for example, taxes residents on capital gains as part of city income tax. Again, the specifics depend on where you live.
Frequently Asked Questions
Do I owe taxes if I own a stock but never sell it?
No. You only owe tax on the gain when you actually sell the stock. If you buy a stock for $100 and it rises to $200 but you never sell, you owe no tax on that $100 gain. You will owe tax only if and when you sell it. This is called an "unrealized gain" until you sell.
What if I inherit stocks from someone?
Inherited stocks receive a "step-up in basis." This means the cost basis is reset to the stock's value on the date of death, not what the original owner paid. If the original owner bought at $50 and it was worth $200 when they died, your new basis is $200. If you sell immediately at $200, you owe no tax. This can save a substantial amount in taxes.
How do I know if a dividend is may have access to or nonqualified?
Your Form 1099-DIV breaks this out for you. Box 1a shows may have access to dividends; Box 1b shows nonqualified dividends. Most dividends from U.S. companies are may have access to. Dividends from foreign stocks, REITs, and money market funds are usually nonqualified. When in doubt, check the form your brokerage sends you.
Can I deduct losses from my stock sales?
Yes. You can use capital losses to offset capital gains dollar-for-dollar. If you have losses beyond your gains, you can deduct up to $3,000 per year against other income. Any excess carries forward to future years. This is why many investors track their losses and use them strategically at year-end.
Do I have to report stocks I own but did not sell?
No. You only report sales, dividends, and other taxable events on your tax return. Simply owning stocks is not reported to the IRS. You only report when you sell, receive dividends, or have other taxable activity related to the stock.