Taxes And Stocks, How Do They Work?

Question

4 simple questions, I think I know the answer to the first already.

#1- You buy $100 in stocks, 15 years from now its worth $200. You have to pay taxes on that $100 you made correct?

#2 - Lets say I bought $100 worth of stocks this year and by next year its worth $110 but I don't cash out, do I have to pay taxes on the $10 I made since I didn't cash out?

#3 - I buy $100 worth of stocks this year, now its worth $110. I sell $10 worth of my stocks, do I have to pay taxes on that $10 or is it considered $10 from my original $100?

#4 - I buy $100 worth of stocks, its now worth $110. I want to invest that $110 in a new stock so I sell it. Do I have to pay taxes on it before I buy the new stock?

Answer 1

1.  yes under current tax law, but who knows what the law might be in 15 years.  The tax is at an advantaged rate however at about 1/2 the regular rate but it depends on you income.

2.  no

3.  yes you would pay tax on $1 worth.  Since you held less than one year it would be taxed at the full tax rate.

4.  yes, but not necessarily before.  You have to pay by April 15 of the following year.

Answer 2

#1 - It depends on how long you had the stock for (short or long term) and which tax bracket you are in.  If long term gain (15 years) and you are in 10-15% bracket you pay no federal tax on capital gains.

#2 No you do not pay tax on a paper gain, you pay tax (or not, see #1) when you cash out.

#3 You can deduct your cost basis first so you would not pay tax on the $10 (also see #1 of course)

#4 If you sell stock and have to pay tax you pay it even if you invest in another stock (unless you have long term gains which are untaxed, already explanied).

Short term gains are those held less than 1 year and 1 day, long term is anything longer.  There is currently no tax paid on long term capital gains if you are in the 10-15% tax bracket, but this could change. Your gains still need to be reported you would just not owe tax on them.

**  I am not a tax expert, but I believe that it is either 5 or 15% tax on long term capital gains, go to the website www.irs.gov and search for long term capital gains tax information there.  I just know about the 10-15% income level since that is where we are.

Answer 3

To add:

Long term gains (over 1 year and 1 day) are 5 or 15% depending on your overall taxable income.  The same with dividend income (though these will most likely go up due to the tax cuts expiring and/or them being raised back up by Congress).

If you have report a capital *loss*, if it is equal (or more) than what you made as gains, the gain essentially isn't taxed.  You are allowed to report $3000 in losses that exceed your gains per year.  If you lose more than $3000 over your gains you can carry over the leftover for other years.

Short term gains are taxed at your regular tax rate.

If you make a big gain, you might have to pay quarterly, otherwise, it would be due by April 15th of the following year.