Do You Have to Pay Taxes on Stocks?

Yes, you have to pay taxes on stocks, but not in every situation. Simply owning stocks, even if they increase in value, does not automatically create a tax bill. A tax obligation is only triggered by specific activities that “realize” your gains or income. The value of your portfolio can fluctuate daily, but the IRS is concerned only with the moments you convert those changes in value into actual cash or income.

Understanding Taxable Events for Stocks

The core principle separating a taxable event from a non-taxable one is the concept of realized versus unrealized gains. An unrealized gain is the increase in a stock’s value while you still own it. For example, if you buy a share for $50 and it is now worth $75, you have a $25 unrealized gain. This “paper gain” is not taxed because you have not yet locked in the profit.

A taxable event occurs when you take an action that turns this potential gain into actual profit. This is known as a realized gain. The most common taxable event is selling your stock. When you sell shares for a higher price than you paid, the profit becomes a realized capital gain and is subject to tax in that year.

The other primary taxable event is the receipt of dividends. Dividends are payments a company makes to its shareholders, representing a distribution of its profits. Unlike capital gains, which require you to sell the stock, dividends are taxable in the year they are paid out to you, regardless of whether you reinvest them or take them as cash. These payments are considered income and must be reported accordingly.

Calculating Taxes on Stock Sales

The calculation of taxes on a stock sale begins with determining your cost basis. The cost basis is the original price you paid for the stock, including any commissions or fees associated with the purchase. For example, if you bought 10 shares at $50 each and paid a $10 commission, your total cost basis is $510. This figure is subtracted from the sale proceeds to determine your gain or loss.

A factor in how your gain is taxed is the holding period, which separates gains into two categories: short-term and long-term. A short-term capital gain results from selling a stock you owned for one year or less. These gains are taxed at your ordinary income tax rates, the same rates that apply to your salary or wages.

A long-term capital gain occurs when you sell a stock you have held for more than one year. These gains receive more favorable tax treatment, with rates of 0%, 15%, or 20%. For the 2025 tax year, the 0% rate applies to single filers with taxable income up to $48,350 and joint filers up to $96,700. The 15% rate applies for incomes above those thresholds up to $533,400 for single filers and $600,050 for joint filers, with the 20% rate applying to incomes above those levels.

If you sell a stock for less than your cost basis, you have a capital loss. These losses can be used to offset capital gains. You must first net short-term losses against short-term gains and long-term losses against long-term gains. If a net loss remains in one category, it can be used to offset gains in the other.

Should you have more capital losses than gains, you can deduct up to $3,000 of the excess loss against your other income, such as your salary, in a single tax year. Any remaining capital loss beyond that $3,000 limit can be carried forward to future tax years to offset future capital gains or be deducted at the same annual rate.

Taxation of Stock Dividends

Dividend income from stocks is also subject to taxation, but the rate depends on whether the dividends are classified as qualified or non-qualified. This distinction is based on specific criteria set by the IRS, primarily related to the source of the dividend and how long you owned the underlying stock.

Qualified dividends are taxed at the same preferential rates as long-term capital gains. For a dividend to be considered qualified, it must be paid by a U.S. corporation or a qualifying foreign corporation. You must also meet a holding period requirement: you must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.

Any dividend that does not meet the criteria for a qualified dividend is considered a non-qualified, or ordinary, dividend. These are taxed at your regular ordinary income tax rates, which are the same rates that apply to your wages and other earned income.

Your brokerage will issue a Form 1099-DIV that breaks down your dividend income for the year. This form will clearly separate your total dividends into ordinary and qualified amounts, making it easier to apply the correct tax rates when you file your return.

Reporting Stock Income and Losses

After the year ends, your brokerage firm will send you tax documents, typically by mid-February. The two primary forms are Form 1099-B, which details every stock sale you made, and Form 1099-DIV, which reports dividend income. Form 1099-B includes the sale date, proceeds, and cost basis, while Form 1099-DIV separates dividends into ordinary and qualified amounts.

The information from Form 1099-B is used to complete Form 8949, Sales and Other Dispositions of Capital Assets. On this form, you will list each stock sale, categorizing it as short-term or long-term. You will report transaction details like acquisition and sale dates, sale price, and cost basis to calculate the gain or loss for each sale.

The totals from Form 8949 are transferred to Schedule D, Capital Gains and Losses. Schedule D summarizes your capital gain or loss activity for the year by combining your short-term and long-term transactions to calculate a net capital gain or loss. This final figure is then carried over to your main tax form, Form 1040.

Dividend income is reported more directly. The total ordinary dividend amount from your Form 1099-DIV is entered on line 3b of Form 1040. The qualified dividend portion, which is included in the total ordinary dividend amount, is entered on line 3a of Form 1040.