Answers ยท Tax Deferred Strategies
How much tax will I pay if I sell stock I have held for 20 years?
You pay tax on the gain, not the full sale price. Federally, stock held more than a year is taxed at 0, 15 or 20 percent, plus a 3.8 percent surtax on high income years. California adds the whole gain to your income and taxes it at up to 13.3 percent. On a large sale, that can come to about a third of the gain.
You are taxed on the gain, and after 20 years the gain is most of the price.
When you sell stock, the tax is not on what you sell it for. It is on the difference between the sale price and your basis, which is roughly what you paid. Hold a good stock for 20 years and that difference can be 80 or 90 percent of the check.
Holding it this long does get you one thing. Anything held more than a year is a long term gain, and long term gains get lower federal rates than your paycheck. That is the whole discount. There is no extra break for 20 years versus 2.
Quick note on who is talking. opfinances.com is a licensed insurance agency. We are not a financial advisor, not a fiduciary, and not a tax adviser. This is general education, not advice about your sale.
The federal rate is 0, 15 or 20 percent, and a big sale reaches the top one.
Long term gains stack on top of your other income for the year. The first slice can be taxed at 0 percent if your income is low. Most of it lands at 15 percent. Above a threshold that changes every year, a little over 600,000 of taxable income for a married couple, the rate becomes 20 percent.
Then there is the 3.8 percent surtax on investment income. It starts when your income passes 250,000 for a married couple or 200,000 for a single filer, and those numbers are not adjusted for inflation. A large stock sale almost always pushes you past them on its own.
California gives no capital gains discount at all.
California does not have a special rate for gains. It adds the whole gain to your income for the year and taxes it like wages, at rates up to 12.3 percent, plus another 1 percent on income over a million.
Twenty years of growth gets taxed in one year. So most of it lands in the top brackets, even if your normal income is modest.
A 1 million gain can cost about 310,000.
Illustrative arithmetic, not a tax estimate. A married couple in California bought 100,000 of one company's stock in 2006. It is worth 1,100,000 today, so the gain is 1,000,000. They have about 150,000 of other income and sell all of it in one year.
Federally, part of the gain is taxed at 15 percent and the rest at 20, about 175,000. The 3.8 percent surtax adds about 34,000. California adds about 100,000. Together that is roughly 310,000, close to a third of the gain, all due for one tax year.
Your numbers will be different. Brackets change every year, and your other income, your deductions, and how much you sell all move the answer. The point is the size of it.
After 20 years, proving what you paid is its own problem.
Brokers were only required to track basis for stock bought in 2011 or later. For older shares, the form your broker sends the IRS may show the basis as missing. If you cannot prove what you paid, the IRS can treat the whole sale price as gain. In the example above, that turns a 1,000,000 gain into 1,100,000.
Twenty years also leaves a messy trail. Reinvested dividends were already taxed each year and add to your basis. Splits, mergers, spinoffs and account transfers all change it. Shares from an employer are their own trap, because the value at vesting was already taxed as wages, and that amount is part of your basis. People who miss it get taxed twice on the same money.
Find the old statements before you sell, not after the form arrives.
The bill is a default, and it locks in when the trade goes through.
That 310,000 is what happens when shares are simply sold. There are structures that can change it, and nearly all of them have to be in place before the sale. Once the trade executes, most of the options are gone.
We are not going to list them here. Which ones fit depends on facts only you have, and some come with real costs and requirements. Sometimes the honest answer is that paying the tax is fine.
One more thing about incentives. We are paid when a client ends up in a product we offer. Nobody is paid when the answer is that you should leave your stock alone. Weigh anything anyone tells you about your sale with that in mind, us included.
Before you decide
Questions worth asking.
What is my actual basis in these shares, including reinvested dividends, splits and mergers, and can you prove it if the broker's form shows it as missing?
If some of these shares came from my employer, is the income I already paid tax on at vesting included in my basis?
How much of this gain will be taxed at 20 percent, and does the 3.8 percent surtax apply?
What will I owe California for the year of the sale, and do I need to make estimated payments after it?
Which specific lots am I selling, and would choosing different lots change the tax?
If you are recommending anything that changes the tax, what does it cost, how are you paid on it, and what happens if I do nothing?
Related
Is stock held for 20 years taxed differently than stock held for 2 years?
No. Federally, any stock held more than a year is a long term capital gain taxed at 0, 15 or 20 percent. Holding longer does not lower the rate further. It usually just means a larger gain.
Does California tax long term capital gains at a lower rate?
No. California taxes capital gains as ordinary income, with no lower rate for long term holdings. The gain is added to your income for the year and taxed at rates up to 12.3 percent, plus 1 percent on income over a million.
What if I do not know what I paid for stock I bought decades ago?
Brokers were not required to track basis on stock bought before 2011, so it may show as missing on your tax form. Old statements, dividend records and company history can rebuild it. Without proof, the IRS can treat the whole sale price as gain.
Do reinvested dividends count toward my cost basis?
Yes. Dividends you reinvested were taxed in the year you received them, so each reinvestment adds to your basis. Leaving them out means paying tax on that money a second time when you sell.
When should I plan for the tax on selling a large stock position?
Before you sell. The tax is set the day the trade goes through, and nearly every structure that changes it has to exist before the sale.
Where this fits.
This question sits inside a bigger one. Tax Deferred Strategies walks through the whole decision rather than this one piece of it.
On Point Finances is a licensed insurance agency, not a tax, legal, or investment adviser. This page is general education, not a recommendation, and reading it does not create a client relationship.