how does capital gains work on stocks

Gianna

I've recently started investing in stocks, and I'm a bit confused about how capital gains work. From what I understand, if I sell a stock for more than I bought it, I owe taxes on the profit. But how exactly is this calculated? Are there different rates for short-term vs. long-term holdings? And what if I sell at a loss—does that affect my taxes too? I’d love some clarity on how this all plays out when tax season comes around.

Mateo

Capital gains tax depends on how long you hold the stock. If you sell within a year, it's considered short-term and taxed at your ordinary income rate. If you hold it for over a year, it's long-term and usually taxed at a lower rate (0%, 15%, or 20% depending on your income). Losses can offset gains, so if you sell some stocks at a loss, it can reduce your taxable gains.

Gianna

Mateo That makes sense—so holding for over a year is basically a tax discount. Does the long-term rate apply to all types of investments, like ETFs and mutual funds, or just individual stocks?

Maverick

Don’t forget about the wash-sale rule! If you sell a stock at a loss and buy it back within 30 days, the IRS won’t let you claim that loss. This tripped me up my first year trading—I thought I was being smart, but it just complicated my taxes. Always check the timing if you’re planning to rebuy.

Carter

One thing that helped me was keeping detailed records of purchase dates and prices. Brokerages provide tax forms (like the 1099-B), but mistakes happen. I once had to correct a form because my broker misreported a holding period. Tracking everything yourself saves headaches later.

Matthew

If you’re in a lower tax bracket, you might pay 0% on long-term gains! For example, single filers making under $44,625 in 2023 qualify. I didn’t realize this until a friend pointed it out—it’s a nice perk for smaller investors.

Layla

Remember, state taxes can add another layer. Some states, like California, tax capital gains as regular income. I moved from Texas (no state income tax) to Oregon and was shocked by the difference. Always check your state’s rules to avoid surprises.