How Are Stocks Taxed?

Do You Pay Taxes on Stocks?

Money you make from owning or selling stocks is taxable. Whether you receive dividends or turn a profit from selling stocks and other investments, you'll generally pay short- or long-term capital gains tax on your earnings. Short-term capital gains (on assets you've owned for a year or less) are taxable as ordinary income; long-term capital gains (on assets held more than a year) are taxed at special capital gains tax rates: 0%, 15% or 20%.

Although the IRS says most income is taxable, there are provisions that can reduce the amount of tax you pay on stock gains. Investing in tax-advantaged accounts, donating shares to charity, deducting capital losses, and timing your investments to take advantage of lower long-term capital gains rates are a few ways to potentially lower your tax bill.

Here's more on how and when stocks are taxed, along with a few tips for keeping your tax liability to a minimum.

What Is Capital Gains Tax?

Profits from selling a stock are considered capital gains. These profits are subject to capital gains taxes. Stock profits are not taxable until a stock is sold and the gains are realized. If your stock increases in value but you don't sell it, your unrealized gain isn't taxable.

Capital gains are taxed differently depending on how long you own a stock before you sell it.

• Long-term capital gains apply to stocks you've held for more than a year.
• Short-term capital gains apply to stocks you sell after holding them for a year or less.

Of course, a stock sale is only considered a gain if you made a profit. If you sell a stock for less than you paid for it, you may be able to report the loss on your tax return and reduce your overall tax bill.

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Long-Term Capital Gains Tax Rates

Depending on your income, the current long-term capital gains tax rates are 0%, 15% or 20%. The dollar amounts at which different tax rates kick in are changed annually to account for inflation. Here's how rates break down by your taxable income and tax filing status in 2025 and 2026.

Source: IRS

Example: Suppose you're a single taxpayer making $85,000. If you buy 100 shares of stock X for $4,000 and sell for $6,700, your capital gain is $2,700. If you owned stock X for more than a year before selling it, you would owe $405 (or 15%) in federal long-term capital gains tax. If your income was $700,000, you would owe $540 (or 20%) in capital gains tax. And if your income was $45,000, you wouldn't owe capital gains tax at all.

Short-Term Capital Gains Tax Rates

Short-term capital gains on investments you've held for a year or less are taxed as ordinary income, using the same marginal tax rates and tax brackets used for your wages. Like other types of taxes, short-term capital gains tax rates are also adjusted annually. Here are the 2025 and 2026 short-term capital gains tax rates by income and filing status:

Source: IRS

Example: Say you turned the same $2,700 profit on Stock X, but this time with a two-week turnaround. Your short-term $2,700 profit would be taxed at the same rate as your regular income. If you're single and your income is $85,000, your short-term capital gain would be taxed at 22%. If you had a larger short-term capital gain of $27,000, some of your gain might be taxed (or partially taxed) at a higher rate, 24%. Using 2026 rates, the first $20,701 of a $27,000 gain would be taxed at 22% and the remaining $6,299 would be taxed at 24%.

How Are Dividends Taxed?

Dividends are taxed at either long-term or short-term capital gains rates. Dividends are income paid out to shareholders of a stock, mutual fund or other investment. They're typically paid quarterly or monthly, in cash or shares, and are taxable based on your income and the type of dividend paid.

• Non-qualified or ordinary dividends, which include most dividends paid to shareholders, are taxed at short-term capital gains rates.
• Qualified dividends come from investments in U.S. or qualifying foreign companies whose stock you've held for at least 61 days of a 121-day holding period. Qualified dividends are taxed at long-term capital gains rates.

IRS requirements for qualified dividends can be complicated. Fortunately, if you've earned dividends of $10 or more from any investment, you'll receive Form 1099-DIV or Schedule K. These forms report your dividend income as either qualified or ordinary dividends, so you don't have to make the distinction yourself.

Learn more: How Much Am I Taxed on Dividend Income?

Additional Tax for High-Income Taxpayers

High earners should also be prepared to pay an additional 3.8% net investment income tax (NIIT). Taxpayers who have a modified adjusted gross income that's higher than the following income thresholds will need to pay this additional tax:

Source: IRS

The tax itself is 3.8% of either your net investment income or your modified adjusted gross income minus the threshold amount, whichever is less.

How Are Stock Options Taxed?

Exercising stock options and selling your shares of stock are both taxable events. Stock options are taxed differently based on a variety of factors, which can make understanding your tax liability difficult. Here's a broad summary of how incentive stock options (ISOs) and non-qualified stock options (NSOs) are typically taxed.

IRS Publication 525 includes more detail on incentive versus non-statutory stock options and how they're taxed. Then again, given the complexities involved in receiving, exercising and selling stock options, you may want to get advice from a tax pro. They can help you accurately estimate your tax liability at each step, so you can make sure you're withholding the correct amount of money at exercise or sale, and that you're reporting and paying tax on your gains appropriately.

Learn more: How to Exercise Your Stock Options

How to Avoid Taxes on on Stocks

You can't avoid taxes entirely, but you can minimize them. One way is to hold onto investments for more than a year before selling them so you can take advantage of favorable long-term capital gains rates. Your broker (or brokerage software) should track this information to help you avoid selling stocks before their time.

Even after taxes, short-term capital gains still put money in your pocket and are a net positive. Still, most of us prefer a lower tax bill to a higher one. A few more ideas for keeping your tax bill down:

• Use tax-advantaged accounts. Money held in tax-advantaged retirement, health savings (HSA) and college savings accounts are typically tax-deferred or even tax-free. Earnings in traditional IRAs and 401(k)s generally aren't taxed until the money is withdrawn. For HSAs, 529 education accounts and Roth IRAs, your earnings aren't taxed at all if you follow IRS guidelines.
• Try tax-loss harvesting. When your investments are down, consider selling some of your shares and "harvesting" the loss to offset capital gains and income on your tax return.
• Donate stocks to charity. Giving stock that you've held for more than a year to a qualified charity could mean a tax deduction for the full market value of the stock. You'll also avoid long-term capital gains taxes.
• Sell when your tax bracket is low. Realizing gains when your income is low can keep your capital gains rate to a minimum.

Learn more: How to Pay Less Taxes

Additional Tax Information to Consider

While you're thinking about how your stock investments impact your taxes, here are a few additional items to consider:

Quarterly Estimated Taxes

If dividends and capital gains will likely increase your tax liability by $1,000 or more, consider making quarterly estimated tax payments on any stock income you have throughout the year.

Quarterly estimated tax payments are due each year on the following dates. When a due date falls on a weekend or holiday, it's generally moved to the next business day.

• April 15
• June 15
• September 15
• January 15 (of the following year)

IRS Form 1040-ES can help you calculate your payment. Or, consult with your tax advisor for help figuring out how much to pay.

State Taxes

You may also be on the hook for state taxes on capital gains and dividend income. Check with your state tax board for more information.

Consulting a Tax Pro

If you're doing more than a few trades a year—or if you're even mildly confused about how these taxes apply to you—consulting with a tax professional may be wise. They can help you devise a tax strategy for your stock profits and keep you on track with any taxes you owe.

Learn more: How to Find a Tax Advisor

Frequently Asked Questions

The Bottom Line

Calculating and paying taxes on capital gains and dividends is definitely not the fun part of winning in the stock market. But understanding long- and short-term capital gains and dividends―and planning ahead to minimize and pay for your tax bill—helps make the process manageable.