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 circ*mstances, 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?
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