Capital Gain Rules When Selling & Reinvesting Stock

When you sell stock at a price higher than you purchased it, you will incur a capital gain. Depending upon the timing involved in the buying and selling of the shares, you may be eligible to use a special lower tax rate on the money you made. As a general rule of the thumb, holding onto a stock for an extended period of time will help ensure that your capital gains tax rate is at a lower rate than it would be if you sold your stock relatively quickly. You can use Form 1040, Schedule D to report these gains and to help you determine if they will help you qualify for the lower capital gains rate.

Short-Term Capital Gain

When completing Schedule D, you will be asked for the date of purchase of your stocks and for the date of sale. These two data points are the only information needed to determine your appropriate capital gains rate. If you held the stocks for less than one year, the capital gain is considered short term, and you will pay ordinary income tax rates. If you have a short-term capital loss, you may subtract the loss from the gain, and the balance will be taxed as ordinary income.

Long-Term Capital Gain

If your entries on Schedule D determine that you held the stock for longer than one year, the capital gains qualify for the lower capital gains rate which, for the 2018 tax year, is a maximum of 20 percent. Depending on your tax bracket, the long-term capital gains tax rate could be 0%, 15% or 20%. If you had a long-term capital loss, you may subtract the loss from the gain, paying 15 percent on the balance.

Dividend Reinvestment Plans

Selling stock that was purchased through a dividend reinvestment plan can be a little more complicated. You may have made your original purchase more than a year ago, but because you are reinvesting, for example, quarterly dividends, you may have some shares purchased within the past 12 months when you decide to sell. Keep good records so you can document what part of your gain is short-term and how much is long-term.

Future Reinvesting Opportunities

If you had a capital gain, there are no special rules about future investments. You may buy new shares of the same company or invest in a totally different company. Only if you had a capital loss would you need to be concerned with the wash sale rule that defines the timing between selling and then reinvesting in shares of the same company or another company in the same industry.