Taking sales proceeds and buying new stock typically doesn't save you from taxes.
The primary goal of all investors is to make money on their investments. Once you're fortunate enough to earn a profit on an investment, however, you also have to do what you can to keep as much as possible out of the hands of the tax man. With some investments, you can reinvest proceeds to avoid capital gains, but for stock owned in regular taxable accounts, no such provision applies, and you'll pay capital gains taxes according to how long you held your investment.
Special tax provisions don't apply to stock
The Internal Revenue Code is full of provisions that allow people to take proceeds from sales of property and reinvest it without having to recognize capital gain. The most popular is in the real-estate industry, where so-called "1031 like-kind exchanges" make it possible for owners to swap properties without any tax consequences. Similarly, in the life insurance industry, what are known as "1035 exchanges" allow policyholders to switch from one life insurance policy or annuity policy to another without having to pay capital gains tax on the paper profits from the policy being swapped out.
No such provisions apply to sales of stock in taxable accounts. Taxpayers have to recognize all of their capital gains. If they've owned the stock for a year or less, then they'll pay short-term capital gains tax at their ordinary income tax rate on the profit. If they've held the stock for longer than a year, then the lower long-term capital gains tax rates will apply.
How to avoid capital gains tax
The fact that there's no way out of paying tax on reinvested gains is one key reason why tax-favored retirement accounts are so popular. Within an IRA, 401(k), or other tax-favored retirement account, you can make sales of stock or other investments without any immediate tax consequences at all. You can then reinvest those proceeds in new stock. Only once you make withdrawals from your retirement account will tax issues come into play.
For your taxable account, though, your best defense against capital gains taxes is to be a long-term investor. You don't have to recognize capital gains on stock until you sell, so that gives those who invest in companies they're comfortable holding for years or even decades a leg up on short-term traders, who will end up paying a much higher tax burden.
Some argue that reinvesting gains from stock sales should be tax-free. Lacking major reform, though, investors should simply take steps to minimize the number of sales that force them to recognize such gains. Click here to compare brokers and choose the one that offers the most benefits for your investing style.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at[emailprotected]. Thanks -- and Fool on!
FAQs
Reinvest in new property
The like-kind (aka "1031") exchange is a popular way to bypass capital gains taxes on investment property sales. With this transaction, you sell an investment property and buy another one of similar value. By doing so, you can defer owing capital gains taxes on the first property.
Are capital gains taxed if they are reinvested? ›
The taxpayers can minimize or avoid paying tax by reinvesting capital gains from residential house property under the Income Tax Act, 1961. The taxpayer can either reinvest the capital gains in bonds or in a residential property. The taxpayer needs to fulfil a few conditions in both of the options to gain tax benefits.
Can you reinvest stocks without paying capital gains? ›
You and other investors who want to avoid paying tax on stocks that have appreciated, will “sell” (in actuality contribute) and reinvest, through a swap. This process involves swapping your appreciated shares for a diversified portfolio of stocks of equivalent value, effectively deferring capital gains tax.
Do reinvested capital gains count as income? ›
While reinvesting dividends can help grow your portfolio, you generally still owe taxes on reinvested dividends each year. Reinvested dividends may be treated in different ways, however. Qualified dividends get taxed as capital gains, while non-qualified dividends get taxed as ordinary income.
What is a simple trick for avoiding capital gains tax? ›
An easy and impactful way to reduce your capital gains taxes is to use tax-advantaged accounts. Retirement accounts such as 401(k) plans, and individual retirement accounts offer tax-deferred investment. You don't pay income or capital gains taxes at all on the assets in the account.
How to avoid capital gains tax over 65? ›
Utilize Tax-Advantaged Accounts: Tax-advantaged retirement accounts, such as 401(k)s, Charitable Remainder Trusts, or IRAs, can help seniors reduce their capital gains taxes. Money invested in these accounts grows tax-free, and withdrawals are not taxed until they are taken out in retirement.
At what age do you not pay capital gains? ›
Capital Gains Tax for People Over 65. For individuals over 65, capital gains tax applies at 0% for long-term gains on assets held over a year and 15% for short-term gains under a year. Despite age, the IRS determines tax based on asset sale profits, with no special breaks for those 65 and older.
How to avoid capital gains tax on stocks? ›
9 Ways to Avoid Capital Gains Taxes on Stocks
- Invest for the Long Term. ...
- Contribute to Your Retirement Accounts. ...
- Pick Your Cost Basis. ...
- Lower Your Tax Bracket. ...
- Harvest Losses to Offset Gains. ...
- Move to a Tax-Friendly State. ...
- Donate Stock to Charity. ...
- Invest in an Opportunity Zone.
7 ways to minimize investment taxes
- Practice buy-and-hold investing. ...
- Open an IRA. ...
- Contribute to a 401(k) plan. ...
- Take advantage of tax-loss harvesting. ...
- Consider asset location. ...
- Use a 1031 exchange. ...
- Take advantage of lower long-term capital gains rates.
Here's how it works: Taxpayers can claim a full capital gains tax exemption for their principal place of residence (PPOR). They also can claim this exemption for up to six years if they move out of their PPOR and then rent it out. There are some qualifying conditions for leaving your principal place of residence.
1. Wyoming. Wyoming is considered to be very tax-friendly towards retirees. There is no state income tax in Wyoming, which means that residents do not pay state taxes on distributions from retirement plan accounts, public or private pension payments or Social Security benefits.
Can you transfer stock without paying capital gains? ›
Gifting stocks may be a way to both give and avoid paying capital gains taxes. Instead of donating cash, investors can donate stock to charities. Investors can donate stock to their kids through custodial accounts.
Can you reinvest capital gains to avoid taxes? ›
Do I Pay Capital Gains if I Reinvest the Proceeds From the Sale? While you'll still be obligated to pay capital gains after reinvesting proceeds from a sale, you can defer them. Reinvesting in a similar real estate investment property defers your earnings as well as your tax liabilities.
What happens if I reinvest capital gains? ›
Reinvest: One of the best way to save on capital gains tax incurred from selling a property for profit is by reinvesting all the proceeds availed from the sale in another property within a certain time frame. The proceeds can be reinvested only in a residential property and not a commercial property.
Does stock capital gains count as income? ›
If you sell stocks for a profit, your earnings are known as capital gains and are subject to capital gains tax. Generally, any profit you make on the sale of an asset is taxable at either 0%, 15% or 20% if you held the shares for more than a year, or at your ordinary tax rate if you held the shares for a year or less.
How to pay 0 capital gains tax? ›
Capital gains tax rates
A capital gains rate of 0% applies if your taxable income is less than or equal to: $44,625 for single and married filing separately; $89,250 for married filing jointly and qualifying surviving spouse; and. $59,750 for head of household.
How do I avoid capital gains on sale of primary residence? ›
Sale of your principal residence. We conform to the IRS rules and allow you to exclude, up to a certain amount, the gain you make on the sale of your home. You may take an exclusion if you owned and used the home for at least 2 out of 5 years. In addition, you may only have one home at a time.
