In times of market volatility or when a financial need arises, it is only natural to consider selling some investments. Understanding the tax consequences of each move is crucial to making an informed decision. Multiple tax rates hold the key to how each sale of an investment will affect your taxes and bank account.
The tax consequence of selling an investment can be complicated. Your tax obligation could be subject to no tax or up to 37 percent tax plus an additional 3.8 percent for the net investment income tax (see chart below for specific tax rates). Here are a few general guidelines to help you navigate the various complexities of investment tax rates.
Generally not taxable. Selling investments within your retirement accounts is not usually a taxable event. The potential tax event occurs when you take the funds out of your account either by a withdrawal or occasionally as a rollover into another account.
Follow the account rules. Each of your retirement accounts has its own set of rules. If you follow them, you can avoid early withdrawal penalties. Following the holding period rules within Roth accounts can also make your withdrawals tax-free.
Other Types of Investment Accounts
Losses. Your losses are first used to offset any investment gains. Any excess losses can offset your ordinary income up to $3,000 per year. So the benefit of losses can be worth next to nothing or up to 37 percent if it offsets ordinary income.
Non-investment losses. Unfortunately, individuals may not offset losses on the sale of non-investment property. So if you sell a car and make money, you need to report the gain. If you sell the car and lose money, there is no deductible loss unless it is part of a business transaction.
Long-term better than short-term. Holding an investment for longer than one year is key if you want to minimize your tax obligation. Short-term gains are taxed the same as wages.
Remember that investment decisions can often have quite different tax consequences depending on the type of account and which tax rate applies. The best suggestion is to seek advice before you make a sell within your investment accounts.