Capital Gains Tax on Selling US Stock: Understanding the Basics

Selling stocks in the United States can be a lucrative endeavor, but it also comes with a tax obligation. Understanding how capital gains tax works on selling US stock is crucial for investors to manage their finances effectively. This article delves into the basics of capital gains tax, explaining what it is, how it’s calculated, and common exceptions to help you navigate this complex area with ease.

What is Capital Gains Tax?

When you sell a stock for a profit, the difference between the sale price and your cost basis (the amount you originally paid for the stock) is considered a capital gain. The capital gains tax is the tax imposed on this gain, which is a percentage of the profit made from selling the stock.

How is Capital Gains Tax Calculated?

The capital gains tax rate varies depending on how long you held the stock before selling it. There are three main categories:

1. Short-Term Capital Gains: If you held the stock for less than a year, the gains are considered short-term. The tax rate on short-term capital gains is usually the same as your ordinary income tax rate, which can be as high as 37%.




2. Long-Term Capital Gains: If you held the stock for more than a year, the gains are considered long-term. The tax rate on long-term capital gains is lower than the rate on short-term gains. The rates vary based on your taxable income, but they typically range from 0% to 20%.

3. Qualified Dividends: If the stock pays qualified dividends, you may be eligible for a lower tax rate. Qualified dividends are taxed at the lower long-term capital gains rates, even if you held the stock for less than a year.

Common Exceptions to Capital Gains Tax

There are some exceptions to the capital gains tax, which can help reduce your tax burden:

1. Gifts and Inheritances: If you inherit a stock or receive it as a gift, the capital gains tax is calculated based on the current fair market value of the stock at the time of inheritance or gifting, not the original cost basis.

2. Small Business Stock: If you sell shares of stock you acquired from a small business, you may qualify for a 100% exclusion from capital gains tax if certain criteria are met.

3. Health Savings Account (HSA) Contributions: If you sell stocks to contribute to an HSA, you can exclude the capital gains tax from your income.

Case Study: Long-Term Capital Gains Tax

Let’s consider an example. Suppose you purchased 100 shares of a company for 1,000 in January 2020 and sold them for 1,500 in January 2021. Since you held the stock for more than a year, the gains are considered long-term. The capital gain is 500 per share, totaling 50,000. If your taxable income is 100,000, the tax rate on this gain would be 15%, resulting in a capital gains tax of 7,500.

In conclusion, understanding the capital gains tax on selling US stock is essential for investors. By familiarizing yourself with the basics, you can make informed decisions and potentially reduce your tax obligations. Remember, consulting with a tax professional is always recommended to ensure you comply with all regulations and take advantage of available deductions and exemptions.

dow and nasdaq today