How Stock Profits Are Taxed and How to Deal With It

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If you’re here, you probably have some experience with the stock market by now.


You understand how to buy and sell stocks. You understand how important it is to create a long-term investing strategy.


But, there’s another subject you need to understand as a long-term investor: taxes.


No one wants to run into surprises during tax season. And although it’s not the most exciting topic, we’ll try to make it as interesting as possible for you.


In this article, you’ll learn:

  1. How your stock profits are taxed.

  2. The two types of taxes you’ll deal with as an investor in the stock market - Dividend tax and capital gains tax.

  3. Some tips on how you can pay fewer taxes on your stock profits.

We hope that after reading this article, you walk away with some value that you didn’t have yesterday.


So buckle up and let’s get started!


First, let’s talk about capital gains.



Capital gains taxes


All of your profits from stocks are categorized in one of two ways:

  1. Long-term capital gains.

  2. Short-term capital gains.


Stocks held for longer than one year are taxed as long-term capital gains if you sell them.


Stocks held for less than one year are taxed as short-term capital gains if you sell them.


Long-term capital gains are taxed at a lower rate compared to their short-term counterpart.


So, it's in your best interest to hold your stocks for longer than one year if you want to avoid higher tax rates.


Let’s dive deeper into the differences between long-term and short-term capital gains.


Short-term capital gains

Short-term capital gains are taxed like ordinary income.


As of 2022, there are 7 tax brackets ranging from 10% - 37% and you can see how taxes can add up if you’re not keeping track of your short-term capital gains.


2022 Tax Rate





Long-term capital gains

With long-term capital gains, there are only 3 tax brackets - 0%, 15%, and 20%.


Like short-term capital gains, your bracket depends on your income.


The income requirements and rates generally change from year to year. So it’s a good idea to be aware of long-term capital gains and how you can plan your investment strategy around these rates.


Here are the long-term capital gains rates for 2022.



Realized v.s. Unrealized capital gains


Oh no. More terms? C’mon!


Don’t worry. This part is super straightforward.


In relation to stocks, “Unrealized capital gains” is another way of saying you haven’t sold your shares even though your investment has increased in value.


“Realized capital gains” means you have sold your stocks and made a profit.


There are also realized and unrealized capital losses, but we won’t get into that just yet.


But for now, all you have to know is that capital gains are only taxed if they’re realized.


So, if you don’t sell your stocks (unrealized gains), then you won’t be taxed on your gains



Dividend taxes

Just like capital gains, dividends are taxed in two different ways:

  • Qualified dividends.

  • Nonqualified dividends.


Nonqualified dividends are taxed at a normal income tax rate while qualified dividends are taxed at the long-term capital gains rate.


So, nonqualified dividends are generally taxed at a higher rate compared to qualified dividends.




Generally, you’ll need to keep shares of the dividend stock for longer than 60 days for common stock and 90 days for preferred stock. Qualified dividends are also usually from domestic corporations with the exception of some foreign corporations.


There are various rules for what constitutes a qualified dividend. So your safest bet is to research your individual dividend-paying stock to figure out its qualified dividend requirements.


Want to pay less in taxes?


Tax-loss harvesting


Remember how we talked about capital gains earlier? Well, in the investing world we also have capital losses.


And don’t get too overwhelmed by all these terms just yet! This one can actually benefit you if you know what you’re doing.


You can use your capital losses to offset your capital gains taxes. The idea is that your capital losses deduct from your capital gains taxes. This strategy is called tax-loss harvesting. Some investors purposely sell their stocks at a loss so they can get a lower tax rate on their profits during tax season.



Use a tax-advantaged account


You can use retirement accounts such as the Roth IRA or 401k to reduce your taxable investments.


If you’re using a regular brokerage account, you don’t have any tax benefits that you would with a retirement account.


Long-term investments


After reading this article, you probably see a trend here; You pay fewer taxes if you’re investing for the long term.


If you purchase stocks just so you can sell them in a month or two for profit, then you’re subject to higher tax rates than if you were to hold the shares over a long period of time.


How to deal with taxes going forward


At the end of the day, it's difficult to predict exactly what you’ll be taxed on your stock profits. Especially if you constantly trade throughout the year. But it's still important to be aware of the different tax rates you’ll deal with as an investor.


Like we always teach at Call to Leap, investing for the long run is the safest route. The government creates tax benefited accounts and lower tax rates for long-term investments. So you might as well use these benefits to your advantage.


Taxes aren’t really a subject that people are passionate about, but we hope that you learned something valuable today. The information you learned today can be used for the rest of your life as an investor. If you found value, please share this article with a friend so they have a better understanding of how to deal with taxes on their stock profits as well.


You can continue to educate yourself by reading the articles in our archive. And you can even join our membership. With our premium membership, we’ll teach you not only how to invest in great long-term stocks, but also sell covered calls and cash-secured puts, trade LEAPS options, and generate a couple hundred to a couple thousand dollars each month. You’ll have exclusive access to our community of wealth builders & all our content, which teaches you step-by-step on how to use these strategies. You’ll also be able to ask me & our team any questions you have & we can coach you each week!