Stock Sales Tax Question

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gpttx
Posts: 26
Joined: Mon Sep 07, 2020 5:56 pm

Stock Sales Tax Question

Post by gpttx »

I have a small amount in a brokerage account, depending on the course of the markets the amount typically fluctuates at +/- $20k. I have recently been debating selling some stock (I hold both individual stocks and ETFs in the account). And, I live in Texas, I've got no state income tax, so all questions below relate to federal taxes.

Question 1 - It is my understanding if a stock is held for >1yr the tax rate is less than if the stock is held <1yr, correct?

Question 2 - If I hypothetically have 100 shares of Stock X (individual or ETF) of which 50 shares were purchased more than a year ago and 50 shares were purchased less than a year ago and I elect to sell 25 shares, how is this taxed? Will it be taxed at the >1yr rate or the <1yr rate? Where are the shares sold "pulled from"?

Question 3 - Many of the stocks I own have at least a small dividend of which I regularly re-invest. Similar question to just above, will the more recent dividends be taxed at <1yr tax rate and the older dividends be taxed at >1yr tax rate?

Question 4 - If I were to sell some stock and it were to hypothetically be used to offset some of the costs for the purchase of a new home, say, using it for the earnest money, would this have any tax implications instead of just using the money for another more frivolous purchase?

Question 5 - While most of the stock I hold has done relatively well, I do hold small amounts of several securities that are down and unlikely to bounce back (in my admittedly amateur estimation). If I hypothetically sell $1000 worth of stock that is up and $300 worth of stock that is down, is tax-loss harvesting simple arithmetic and I would be on the hook for $700? And again, does purchase of a new home with this money change any of the tax implications here as well?

I appreciate everyone's advice!
shess
Posts: 2164
Joined: Wed May 17, 2017 12:02 am

Re: Stock Sales Tax Question

Post by shess »

Suggestion: You might want to spend a 30 or 60 minutes reading pages on the wiki. Your questions are specific enough that you could probably search and find pretty relevant information if you want to learn more, or perhaps use some of my responses below to inform your search terms.

#1 - short term gains are taxed at your marginal rate, long-term gains are taxed at your long-term capital gains rate, which you can easily lookup with a web search. If your income is beyond $250k, you also are subject to Net Investment Income Tax of 3.8% on the investment income above $250k.

#2 - Most brokerages allow you to select various options for selling, such as first-in-first-out, lowest-gains, etc. Then it will sell the specific shares to meet your chosen option. You can also select the average-cost method, which allocates across all of your positions. Many people would use one of the options which identifies specific lots, to provide the best control over how you are realizing the gains.

#3 - You are taxed on the dividend payment in the year you receive it REGARDLESS of reinvestment. The tax treatment of the shares purchased by the dividend reinvestment selection are EXACTLY as if you accepted the dividend cash and then purchased those shares manually. Holding period doesn't affect the taxation of the original dividends, just the taxation on the gains on the shares purchased with those dividends. Personally, I prefer to let the cash accumulate and manually invest when it gets big enough, so that I don't have a ton of tiny tax lots.

#4 - The IRS doesn't care why you are selling the shares. You can avoid the taxes on long-term gains by giving the shares away, but if you prefer to benefit from those gains, you have to pay taxes on them.

#5 - For losses, there's a method which nets the losses against gains. IMHO, if you have specific questions about how it works, it's best to just pull up the form for Schedule D and work some sample numbers. Purchasing a home isn't relevant at all.

There are generally three easy ways to avoid paying capital-gains taxes on stocks. You can die, which results in a step-up of basis, you can give the shares to charity, or you can give the shares to someone else and let them pay the taxes. But if you would like to take advantage of those gains to buy a house or a car or food, you pretty much have to pay taxes on them!
rkhusky
Posts: 17764
Joined: Thu Aug 18, 2011 8:09 pm

Re: Stock Sales Tax Question

Post by rkhusky »

gpttx wrote: Fri Aug 19, 2022 11:19 pm Question 5 - While most of the stock I hold has done relatively well, I do hold small amounts of several securities that are down and unlikely to bounce back (in my admittedly amateur estimation). If I hypothetically sell $1000 worth of stock that is up and $300 worth of stock that is down, is tax-loss harvesting simple arithmetic and I would be on the hook for $700?
Note that when selling stock at a loss you need to be careful about wash sales, which happen when you sell for a loss and have bought or will buy shares of that stock within the period 30 days before to 30 days after the sale for a loss. The loss is disallowed and the basis of the replacement stock is adjusted up to compensate (unless the replacement shares are purchased in a tax-advantaged account, upon which the loss is permanently disallowed). (For ETF's, mutual funds, and bonds, the wash sale law is also triggered by "substantially identical" replacement shares, which are very close, but not identical replacements.) Wash sales are determined on a lot by lot basis, not on the overall loss or gain of the sale.
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