Here’s How to Make Money on Stocks Without Owing a Dime in Taxes

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With the right strategy, you can avoid paying taxes when you sell stocks at a profit. Read on to learn more. 

The whole purpose of investing in stocks and other assets is to make money. One way to do that is to sit back and watch dividend income hit your brokerage account. Another way is to sell stocks and other assets at a price that’s higher than what you paid.

If you buy 10 shares of a given company at $100 a pop, or $1,000 total, and then sell them once that share price climbs to $200, you’ll make $1,000. And that’s a good thing.

But you should also know that when you sell stocks at a profit, you’re charged capital gains taxes. In some cases, though, it may be possible to avoid those taxes completely. And if you can’t do that, you can at least minimize them.

When capital gains taxes don’t apply at all

Capital gains are broken down into two categories — short term and long term. Short-term capital gains apply to investments sold after a year or less. Long-term capital gains apply to investments that are held for at least a year plus one day prior to being sold.

The capital gains category you fall into matters for a big reason. Long-term capital gains are taxed at a much more favorable rate than short-term capital gains.

Short-term capital gains are taxed the same as ordinary income. So your rate there depends on your tax bracket. Your tax bracket represents your tax rate on your highest dollars of earnings.

Long-term capital gains, meanwhile, are capped at 20% for very high earners — singles making over $492,300 and couples making over $553,850. That’s lower than most tax brackets.

If you earn an average wage, you can expect to pay 15% for long-term capital gains. But if you’re a lower earner, you can avoid taxes entirely on long-term capital gains.

Specifically, your long-term capital gains tax rate will be 0% if you’re single with an income of $44,625 or less, or if you’re married with an income of $89,250 or less. And it doesn’t matter what sort of gain you’re looking at. If you hold a given stock for at least a year and a day before selling it, your capital gains tax bill will be $0.

When you owe some taxes but are able to minimize them

To pay 0% on long-term capital gains, you need to earn a relatively low income. But even if you can’t get out of paying taxes on capital gains completely, you can still sell assets strategically to minimize your tax hit.

If your income is between $44,626 and $492,300 and you’re single, your long-term capital gains tax rate is 15%. So, let’s say you’re looking to sell stocks and walk away with a $1,000 profit, and you earn $100,000 a year. Your capital gains tax rate for short-term gains is 24% based on that salary. That leaves you with a $2,400 tax bill. If you wait until at least a year and a day to sell those stocks, you’ll face a $150 tax bill instead.

In fact, as a general rule, you should always check the date on which you purchased a given stock before selling it so you know what sort of tax implications you’re looking at. In some cases, waiting just a handful of days could lower your tax bill substantially.

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