Ashley Jackson

Stocks can be a profitable, long-term wealth generator that puts more money in your pocket. However, when you sell those stocks for a profit, your tax bill is going to change quite a bit. 

Profits on stocks are usually taxed at different rates depending on how long you held the stock. If you hold the stock for more than a year before selling it, then your profit could be taxed at 20%, 15%, or even 0%. However, if you hold the shares for less than a year and then sell at a profit, you may be taxed at your usual tax rate for that money. Dividends paid by the company to shareholders are also taxable, but there are exceptions to this rule. 

Everyone wants to grow their wealth, and investing is a great way to do it. If you’d like to continue growing your retirement fund, an education savings account, or even just to make a little extra money, lowering your taxes on the profits from your stocks is critical.

Taxes on capital gains

Standard brokerage accounts pay capital gains taxes on the profits from shares bought and sold. As mentioned above, the tax rate on those profits will differ depending on the timeframe in which you held those shares. Capital gains taxes apply to the sale of an asset for more than what was paid.

In the short term, meaning less than a year, selling stocks for a profit will trigger a tax rate that is equal to your tax bracket. This could be quite high depending on your tax bracket, which is why you should consult a tax professional if you are unsure of what bracket you are in. 

Assets sold after a year of holding them will trigger capital gains tax rate. Rates vary from 0% to 15% up to 20% depending on your tax bracket (taxable income) and filing status (single, married, common law). 


Dividends are quarterly payments made by companies to shareholders. These can be a great way to boost your stock returns as you continue to earn money every three months if the company you invested in is doing well. 

There are two types of dividends: non-qualified and qualified.

Non-qualified dividends are also referred to as ordinary dividends. These are taxed at the same rate as your normal tax bracket, like profits on shares held for under a year. 

Qualified dividends are taxed in a similar way to profits earned on shares held for more than a year at a rate of 0%, 15%, or 20%. Again, this is dependent on a variety of factors, including your filing status and income. 

Higher and lower rate scenarios

No matter if it is a profit from selling an asset or a dividend received (qualified or nonqualified), the higher your tax bracket, the more you will pay on your investments. The capital gains tax may also change from time to time as governments shift tax laws and rewrite the tax brackets. 

How to lower your tax bill 

Everyone wants to lower their tax bill, and if you can pay a little less on your capital gains tax. There are a couple of things you might want to try to lower your capital gains tax rate and keep more of your profits and dividends.

Increase your holding period

Instead of selling your shares after a short period, hold on to them for more than a year. Capital gains tax will decrease the longer you hold them. The same rules apply to dividends. If you hold the shares long enough, dividends can count as qualified. Those qualified dividend payments are taxed at a lower rate than regular income, sometimes even 0%, and this adds up to significant savings. 

Losses help reduce taxable gains

The taxable amount on stocks and other assets sold for a profit can be reduced by using capital losses to offset the amount. When you lose money on an investment, it is counted toward a total called your “net capital gain.” This total is the difference between your capital gains and your capital losses.

The final tally is the taxable amount for which you will need to pay capital gains tax. Unfortunately, in some cases, your losses may exceed your gains. This difference can then be deducted from your total tax return. 

Account Type

There are other accounts that will bring down the tax rate of your profits from stocks, in some cases, to 0%. An IRA, 401(k), or a tax-free or tax-advantaged account can help bring down your capital gains tax bill. These accounts are popular alternatives to a regular brokerage account and are often used to build wealth over the long term while saving for retirement or other long-term goals.

Traditional IRA and Roth IRA

A traditional IRA will allow you to defer taxes, so you can add pre-tax dollars into that account. For Roth IRA, only post-tax dollars can be deposited into the account, and you’ll have withdrawals on a tax-free basis as long as you meet certain conditions.


401(k) accounts allow you to pay 0% in taxes on investments, including dividends and capital gains, so long as the money stays in the account. After you withdraw, you will be subject to taxes.

Final thoughts

No matter your investment vehicle of choice or the timeframe for buying and selling shares, lowering your capital gains tax rate is a great way to put more money into your pocket. It is important to keep up to date on capital gains rates as well as the account options available to help lower your tax rates and build wealth faster.

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