With the recent volatility in the stock market, it is only natural to want to sell your investments. While the market may panic, making an informed, calm, and planned decision can be your best option. Part of this decision-making process is understanding the tax consequences of selling your investments.
|Investment Tax Rates|
401(k), 403(b), traditional IRA, SEP IRA, SIMPLE IRA
|Ordinary income (when funds are withdrawn from the account)||Determined by the account type (usually withdrawals after age 59½)||0% up to 39.6%*||There is not a tax event when an investment is sold within your account. The tax rate depends on your annual income at time of fund withdrawal.|
Roth IRA and Roth 401(k)
|No tax on withdrawals||5 years and 59½ years old or older.||N/A||Earnings are not taxed as long as rules are followed.|
|Short Term Capital Gains (STCG)||Ordinary income||1 year or less||0% up to 39.6%*||For investment sales such as stocks and bonds|
|Long-term Capital Gains (LTCG)||LTCG rates||More than 1 year||
|For investment sales such as stocks and bonds|
|Depreciation Recapture||Special||Any||25%||When you sell property that has been depreciated in prior years, part of your sale price may be taxed as a recapture of this prior period depreciation.|
|Collectables||Special||Any||28%||A special tax rate applies to gains on the sale of items you collect; like coins and baseball cards.|
|Investment losses||Ordinary income||Any||Offset benefit:
0% up to 39.6%
|Losses can offset income up to $3,000 each year|
|* a3.8% Net Investment Income Tax may also apply to these earnings.|
As the above tax rate chart suggests, understanding the tax consequence of selling an investment can be complicated. Your tax obligation could be subject to no tax or up to 39.6% plus an additional 3.8% for the Net Investment Income Tax. Here are some things to think about.
Within retirement accounts
|Selling investments within retirement accounts. Selling investments within your retirement accounts is not usually a taxable event. The potential tax event occurs when you take the funds out of your account either by a withdrawal or occasionally as a rollover into another account.|
|Follow the account rules. Each of your retirement accounts has its set of rules. If you follow them, you can avoid early withdrawal penalties. Following the holding period rules within Roth accounts can also make your withdrawals tax-free.|
Gains and losses outside retirement accounts
|Losses. You may deduct investment losses of up to $3,000 per year. These losses first offset any investment gains. If there are no gains your loss can offset your ordinary income. So the benefit of losses can be worth next to nothing or up to 39.6% if it offsets ordinary income.|
|Non-investment losses. Unfortunately, individuals may not offset losses on the sale of non-investment property. So if you sell a car and make money, you need to report the gain. If you sell the car and lose money, there is no deductible loss unless it is part of a business transaction.|
|Long-term better than short-term. Holding an investment for longer than one year is key if you want to minimize your tax obligation. Short-term gains are taxed the same as wages.|
If nothing else, please remember your investment decisions can often have tax consequences. Please ask for help before taking action.