Hot stock market… Two simple yearend tax strategies

Stock market is at a record high… time to cash in on those hot stocks. Consider these two strategies for minimizing your taxes.

Gain or Loss

The first step is figure out if you have a taxable gain or loss. The calculation is the selling price less the amount you purchased the stock. (selling price – purchase price = gain or loss)

Example 1 – You sold stock for $17,500 that you purchased for $10,000. 17,500 – 10,000 = $7,500 gain.

Example 2 – You sold stock for $17,500 that you purchased for $22,000. 17,500 – 22,000 = $4,500 loss.

Tax Strategy #1 – Offset stock gains with stock losses

Did you cash in on stocks with significant gains? Consider selling stocks with losses before the end of the year to minimize the taxable gains. Use stock losses to offset stock gains.

For example, you sold stock earlier this year with $10,000 of taxable gains.  You have some stocks with losses. One of the stocks is currently at a $8,000 loss. Selling the stock with the loss can be used to offset the gain on the other stock. 10,000 – 8,000 = $2,000 reportable gain.

Long-term or Short-Term

The second step is to figure out if long-term or short-term tax rates apply. A long-term stock is stock you have held for longer than year. A short-term stock is stock you have held for less than a year.

Example 3 – You purchased the stock in 2015. You have owed this stock for longer than a year, as it is 2017. This is a long-term stock.

Example 4 – You purchased the stock in 2017. You have owed this stock for less than a year, as it is 2017. This is a short-term stock.

Tax Strategy #2 – Hold off on selling short-term stock

Gains on short-term stocks are taxed at your income tax rate. For 2017, your income tax rate will be anywhere from 10% to 39.6%. This can get expensive.

Gains on long-term stocks are taxed at capital gain tax rates. For 2017, capital gain tax rates are either 0%, 15% or 20%. This means a portion of your stock sales considered long-term may not be taxed at all – 0%. Only the top income earners will see 20% tax rates on stock sales.

Sell long-term stock rather than short-term stock will minimize your tax on gains. Capital gain stock rates on long-term stock are move favorable to income tax rates on short-term stock. In addition, if you have many shares of one stock with some considered long-term and others considered short-term, sell the long-term stock first to get favorable tax rates.