Here’s What Happens When You Cash Out a Stock at a Profit a Week After Buying It

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

Profits on stocks can lead to capital gains taxes. Read on to see what those entail when you’ve only held your stocks a short time. 

It’s generally a good idea to load your brokerage account with quality stocks and hold them for many years. That way, over time, your shares can gain value.

But there may come a time when you decide to sell a stock quickly after buying it. Let’s say you purchase shares of a given company, and suddenly, a week later, positive news sends the price soaring. You know that higher price is likely unsustainable, so you decide to sell while that stock is trading at a high to maximize your profits.

Any time you sell stocks at a price that’s higher than what you paid for them, you’re liable for taxes on your capital gains. But when you sell stocks at a profit a week after buying them, your capital gains tax bill is even higher.

Your timing matters

Capital gains taxes on investment are grouped into two categories — long-term gains and short-term gains. Long-term gains apply to stocks you hold for at least a year and a day prior to selling them. Short-term gains apply to stocks you hold for a year or less.

And to be clear, it doesn’t matter whether you sell your stocks after one week, one month, or one year. If you don’t hold your stocks for a year plus one day, you’ll land in the short-term capital gains category.

Why does it matter? It’s simple. The gains category you fall into will dictate what your tax bill will look like.

Short-term capital gains are taxed at a less favorable rate than long-term gains. In fact, they’re taxed at the same rate as your ordinary income.

So, let’s say you sell your stocks at a profit and make $1,000. If you’re single and earning $100,000 a year, that puts you in the 24% tax bracket for short-term gains as well as ordinary income. (This doesn’t mean that every dollar of income of yours is taxed at 24%, but rather, your higher dollars of earnings.) Based on this, your $1,000 short-term gain would result in a $240 tax bill.

Long-term capital gains, by contrast, are subject to lower tax rates. If you’re single earning under $44,626, you actually won’t pay any taxes on long-term gains. If you’re single earning between $44,626 and $492,300, you’ll pay 15%. And if your earnings exceed $492,300, you’ll pay 20%.

So in our example, let’s say you were looking at long-term capital gains rather than short-term gains. Your tax bill in that scenario would only be $150, compared to $240 for short-term gains.

Sometimes, it pays to wait

Under certain circumstances, it can make sense to sell a stock at a profit before you’ve held it for a year and a day or longer. But if there’s not a compelling reason to sell sooner, then it’s generally best to try to bump yourself into the long-term capital gains caretory to minimize the tax hit involved. After all, why pay the IRS more money than you have to in the course of selling a stock?

Our best stock brokers

We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review our best stock brokers.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More