The stock market’s been up for while! Have you sold some of your winners to lock in gains? Many investors have taken profits in 2024. There’s nothing like picking a winner and making money. However, whenever you earn money, you’re usually going to owe Federal and state tax on it. How do taxes work when you log a big stock market gain?
How Are Stock Profits Taxed?
Stock sales are taxed as capital gains. That’s a different classification and comes with different tax rates than the income tax brackets that wages, bank interest, and other types of income fall into. Things used for personal purposes, pleasure, business, or investment are capital assets, including homes, household furnishings, stocks or bonds; coin and stamp collections, gems and jewelry, precious metals, or business property.
Tax Brackets for Most Categories of Income
For normal income, taxpayer income is progressively taxed based on seven federal income tax rates and brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The IRS explains that you pay tax as a percentage of your income in layers called tax brackets. As your income goes up, the tax rate on the next layer of income is higher. When your income jumps to a higher tax bracket, you don't pay the higher rate on your entire income. You pay the higher rate only on the part that's in the new tax bracket.
For example, a single taxpayer in 2024 with a taxable income of $100,525 would pay 10% on $11,600, then a 12% rate on the amount from $11,601 to $47,510, and a 22% rate on the amount from $47,511 to $100,525.
Tax Brackets for Capital Gain Income
When it comes to capital gains, the tax brackets are different. There are three possible capital gain taxes/tax rates to be aware of.
Short-term (ST) rate: ST losses are taxed at normal rate (Table 1). ST capital gains are taxed according to your ordinary income tax bracket: 10%, 12%, 22%, 24%, 32%, 35% or 37%. State rates differ, and some states — like Georgia — have the same rate for ST and LT gains.
Long-term rate: LT losses are taxed at capital gains rate of 10%, 15%, or 20% depending on your adjusted gross income (AGI), as explained by the IRS.
Net investment income tax (NIIT) rate: Once a single taxpayer earns taxable income over $200K in a year ($250K for married couples), you’ll also pay NIIT, an additional 3.8% tax that can be triggered if your income exceeds a certain limit.
Doing the Math on Taxes Owed for ST and LT Gains for Fed and State
How can you figure out how much you might owe on the awesome money you made from your stock sales? Here’s a simplified to-do list. It’s not comprehensive, and it doesn’t take into account all the many tax considerations, but it will give you a ballpark idea of what might get added to your tax bill. Most of us earn the majority of our income from our W2 jobs where our income taxes are collected for us and sent to the IRS via estimated taxes with every paycheck.
Tax Withholding
Stock profits are different because no tax is withheld for you. The money gets added to other income from employment, dividends, or interest, and nothing’s been sent to the IRS at all. There can be a long period between when you sell stock for a profit and then need to pay the tax. If you sell in Feb 2024 and don’t do your 2024 taxes until April 2025, it’s easy to forget that you made so much taxable money.
Aggregating Gains and Losses
First, remember that your ST stock market losses for the year can be subtracted from your ST gains and your LT stock market losses for the year can be subtracted from your LT gains. For example, if you sold some LT stocks for a profit of $50K but you sold other LT stock for a loss of $70K, you actually have an LT loss for the year, not a gain at all.
This article is aimed at helping you figure out what to do when you have a bonafide gain that is not reduced by losses. If have a gain for the year, you can estimate the highest tax bracket you fall into and multiply that percentage by the amount of the gain and know how much tax you’ll likely owe.
Example of Figuring Out If You Owe Taxes on Your Stock Market Profits
Will you owe taxes on your stock market profits? Once you know your likely total gains, you can get a ballpark of how much you will owe in taxes. For ST gains, you take your top tax bracket and multiply it by the amount of gains. For LT gains you take your capital gains tax bracket (probably 15%) and multiply it by the amount of gains.
Here are examples of a Georgia taxpayer who earned $44K in ST and LT gains in one year and whose highest tax bracket is 22%:
ST of $30K taxed at ordinary rate (22% is $6,600)
LT of $14K taxed at 15% cap gains rate (15% would be taxable amount of $2,100)
Totals to $8,700 in Federal tax
Take the capital gains rate of your state times the gains. In this example, the state of Georgia taxes ST and LT gains at 5.75%, so $44,000 x 5.75% is $2,530 in Georgia
That’s a total tax bill of Fed + State that you wouldn’t have had withheld of $11,230 for the year that you are likely to owe in addition to your regular taxes. You’d want to pay estimated taxes for this bill or at least set the money aside for the next April tax due date.
How to Pay Fed and State Estimated Taxes
You can mail a check — instructions and form here. Mail to the Internal Revenue Service address for your state. For example, a Georgia resident would mail the form to P.O. Box 1300, Charlotte, NC 28201-1300.
Do online direct pay here.
You can pay online after you register with EFTPS, link here. It takes a week or so to get set up with EFTPS but that tends to be the easiest way to do and then you’ll be ready to go for future tax years. Here are the steps. After you do the online enrollment, they mail you a password and then you can make your payment.
Check the Department of Revenue site for your state. For example, you can pay Georgia's estimated taxes here. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax.
General Tax Reduction Ideas
To be brutally honest, relatively few ways exist for regular people to reduce their taxes:
Self-employment (because you can deduct expenses that W2 income prohibits)
Business ownership (for the expenses and also for the Schedule C and K1 losses as the business gets going. Remember though, that the goal is for the business to be successful and make you and your family lots of money.
Tax-deferred retirement plans (like Traditional 401(k) and Traditional IRA, but for folks your age, I usually recommend halfsies on Traditional/Roth contributions because over the long-term the earnings in the Roth are untaxed.)
Rental real estate especially if you could do it with family members to share the cost burden.
A Health Reimbursement Account (HRA or HSA) can also help a little.
There are a few other schemes and ways to reduce taxes, but they are complicated and the jury’s out on whether the effort is worth the result.
Will You Owe Taxes on Your Stock Market Profits? Remember That Paying Taxes Means You Earned Money
Taxes are annoying and costly, but remember that you only pay taxes on money you made. It’s far better to add money to your net worth than not to earn it at all. If you plan for the taxable burden of stock market gains, you won’t be surprised. Rich people get richer through passive income streams, so anytime you create those for yourself, you’re doing great. If you pocket $41K from your brilliant stock trading, that’s cash you passively earned. When you sell, the cash comes back into your back. If you can do the math to estimate your tax bill and either tuck that money back to pay your tax bill in April or do estimated tax payments to the IRS and your state government, it won’t be a stress at tax time.
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