You pay taxes on stocks in two situations: when you sell them for a profit, and when they pay you dividends

The tax you owe depends on how long you held the stock before selling it and what type of income the stock generated. If you sell a stock for more than you paid for it, that profit is capital gains, and it is taxable. If a company pays you money from its earnings while you own the stock, that is a dividend, and it is also taxable. You do not pay tax straightforward for owning a stock that goes up in value — only when you sell it or receive a dividend payment.

The tax rate you pay depends on how long you held the stock. Stocks you own for less than one year are taxed as short-term capital gains, which means they are taxed at your ordinary income tax rate — the same rate as your salary or wages. Stocks you own for one year or longer are taxed as long-term capital gains, which usually means a lower rate: 0%, 15%, or 20%, depending on your income. Dividends are taxed either as ordinary income or at the long-term capital gains rate, depending on whether the company classifies them as may have access to or non-may have access to.

Key Takeaways

  • You owe tax when you sell a stock for more than you paid for it, and the tax rate depends on whether you held it for less than one year (ordinary income rate) or one year or longer (0%, 15%, or 20%).
  • Dividends paid by companies are taxable in the year you receive them, and the rate depends on whether they are may have access to dividends (usually 0%, 15%, or 20%) or non-may have access to (your ordinary income rate).
  • You do not owe tax on a stock that increases in value unless you sell it or it pays a dividend.
  • Your brokerage firm sends you a Form 1099-B (for sales) and Form 1099-DIV (for dividends) that you use to report stock income on your tax return.

Short-term capital gains: stocks you sell within one year

When you sell a stock you have owned for less than one year, the profit is taxed as short-term capital gains. This means the IRS treats it the same way it treats your wages or salary — it is added to your other income for the year and taxed at your ordinary income tax rate. If you are in the 22% tax bracket, your short-term capital gains are taxed at 22%. If you are in the 35% bracket, they are taxed at 35%.

The holding period starts the day after you buy the stock and ends the day you sell it. If you bought a stock on March 15 and sold it on March 14 of the following year, you held it for less than one year, and the gain is short-term. If you sold it on March 15 or later, you held it for one year or longer, and the gain is long-term.

Short-term gains are usually the most expensive way to make money from stocks, because you pay your full income tax rate instead of the lower long-term rate. This is one reason many investors try to hold stocks for at least one year before selling.

Long-term capital gains: stocks you hold for one year or longer

When you sell a stock you have owned for one year or longer, the profit is taxed as long-term capital gains. The federal tax rate on long-term gains is 0%, 15%, or 20%, depending on your income level and filing status. These rates are much lower than the ordinary income tax rates, which range from 10% to 37%.

The 0% rate applies to lower-income taxpayers. For 2024, the 0% rate applies to single filers with taxable income up to $47,025 and married filers filing jointly with taxable income up to $94,050. The 15% rate applies to middle-income taxpayers, and the 20% rate applies to the highest earners. These income thresholds change each year.

Because long-term capital gains are taxed at lower rates, holding a stock for at least one year before selling can save you money in taxes. The difference between the short-term rate and the long-term rate can be substantial — for example, if you are in the 24% tax bracket, a short-term gain is taxed at 24%, but a long-term gain is taxed at 15%.

Dividend income: money paid to you while you own the stock

When a company pays a dividend, it sends money to shareholders. You owe tax on that dividend in the year you receive it, even if you do not sell the stock. The tax rate depends on whether the dividend is may have access to or non-may have access to.

A may have access to dividend is paid by a U.S. corporation or a foreign corporation whose stock is traded on a U.S. exchange, and you must have owned the stock for more than 60 days during a 121-day window around the dividend payment date. may have access to dividends are taxed at the long-term capital gains rate: 0%, 15%, or 20%. A non-may have access to dividend does not meet these rules and is taxed at your ordinary income tax rate, the same as your salary.

Most dividends from large U.S. companies are may have access to. Dividends from real estate investment trusts (REITs), master limited partnerships (MLPs), and some preferred stocks are usually non-may have access to. Your brokerage firm tells you on your tax form which dividends are may have access to and which are not.

How to report stock income on your tax return

Your brokerage firm sends you two main tax forms: Form 1099-B for stock sales and Form 1099-DIV for dividends. These forms list each transaction and the amount of gain or loss. You use these forms to fill out Schedule D (Capital Gains and Losses) on your federal tax return.

On Schedule D, you list each sale separately and calculate the gain or loss by subtracting what you paid (your cost basis) from what you received when you sold it. You separate short-term sales from long-term sales. The form then calculates your total short-term and long-term gains or losses for the year. If you have a net loss, you can deduct up to $3,000 of it against other income in that year, and carry forward any remaining loss to future years.

Dividend income goes on Schedule B (Interest and Ordinary Dividends) or Schedule 1 (Additional Income), depending on the amount. You report the total amount of may have access to dividends and the total amount of non-may have access to dividends separately so the IRS can tax them at the correct rates.

Losses: when you sell a stock for less than you paid

If you sell a stock for less than you paid for it, you have a capital loss. Capital losses can reduce your taxes. You can use a capital loss to offset capital gains from other stocks, which reduces the amount of gain you owe tax on. If your losses are larger than your gains, you can deduct up to $3,000 of the net loss against your ordinary income in that year.

Any loss larger than $3,000 carries forward to the next year. For example, if you have a $10,000 net capital loss in 2024, you can deduct $3,000 in 2024 and carry forward the remaining $7,000 to 2025, where you can deduct another $3,000, and so on until the loss is used up.

Some investors use this strategy intentionally: they sell losing stocks late in the year to offset gains from winning stocks, reducing their total tax bill. This is called tax-loss harvesting. However, if you sell a stock at a loss and buy the same stock or a substantially identical stock within 30 days before or after the sale, the IRS disallows the loss under the wash-sale rule.

Tax-advantaged accounts: stocks in IRAs and 401(k)s

If you own stocks inside a traditional IRA or 401(k), you do not pay tax on the gains or dividends while the money is in the account. You only pay tax when you withdraw the money, and you pay tax on the entire withdrawal amount at your ordinary income tax rate, regardless of whether the gains were short-term or long-term.

If you own stocks inside a Roth IRA, you do not pay tax on the gains or dividends at all, as long as you follow the withdrawal rules. Roth withdrawals are tax-free after age 59½ if the account has been open for at least five years. This makes Roth accounts powerful for long-term stock investing, because all the growth is tax-free.

Because of these tax advantages, many investors hold stocks they plan to keep for a long time inside IRAs or Roth accounts rather than in regular taxable brokerage accounts. This lets the money grow without being reduced by annual taxes on dividends and gains.

State and local taxes on stocks

In addition to federal tax, some states tax capital gains and dividends. Most states tax capital gains as ordinary income at their regular income tax rate. A few states — including California, New York, and Massachusetts — have higher tax rates on capital gains for high-income earners. Some states, like Florida, Texas, and Washington, do not have a state income tax at all.

If you live in a state with an income tax, you report your capital gains and dividends on your state tax return as well as your federal return. Your state uses the same forms (Schedule D and Schedule B) to calculate your state tax liability. The tax you owe to your state depends on your state's tax rate and your income level.

Frequently Asked Questions

Do I owe tax if my stock goes up but I do not sell it?

No. You only owe tax when you sell the stock or when it pays a dividend. An increase in value that you have not sold is called an unrealized gain, and it is not taxable. Once you sell the stock, the gain becomes realized and is taxable.

What is the difference between short-term and long-term capital gains?

Short-term gains are from stocks you owned for less than one year and are taxed at your ordinary income tax rate (10% to 37%). Long-term gains are from stocks you owned for one year or longer and are taxed at 0%, 15%, or 20%. Long-term rates are usually much lower.

How do I know if a dividend is may have access to or non-may have access to?

Your brokerage firm reports this on Form 1099-DIV. Most dividends from large U.S. companies are may have access to. Dividends from REITs, MLPs, and some preferred stocks are usually non-may have access to. The form separates them for you.

Can I use a stock loss to reduce my taxes?

Yes. You can use capital losses to offset capital gains. If losses exceed gains, you can deduct up to $3,000 of the net loss against your ordinary income in that year. Any remaining loss carries forward to future years.

Do I pay tax on stocks in a Roth IRA?

No. Roth IRAs are tax-free accounts. You do not pay tax on gains, dividends, or withdrawals, as long as you follow the withdrawal rules (age 59½ and the account is at least five years old). This makes them powerful for long-term stock investing.