Q: I'm considering selling one of my stocks at a $5,000 profit. Is there any way I could get out of paying capital gains tax on the sale?
The capital gains tax you'll owe generally depends on two main factors: your total income (adjusted gross income) and how long you owned the stock. Profits earned on stocks that you held for a year or less are considered to be short-term capital gains, and are taxed at your marginal tax rate, or tax bracket. On the other hand, if you held the stock for at least a year and a day, the profit qualifies as a long-term capital gain, and is taxed at more favorable rates.
Continue Reading Below
Having said that, there are three main reasons investors may not have to pay capital gains tax.
First, if you've owned the stock for over a year and you fall into the 10% or 15% tax bracket, your long-term capital gains tax rate is 0%.
The second way is if you own the stock in an IRA or other tax-advantaged account. If this is the case, you won't owe any capital gains tax on the sale this year, but if it's a traditional IRA, your eventual withdrawals will be taxable income.
Finally, if you have any capital losses, you can use them to offset your capital gains. In other words, if you sell one stock at a $5,000 profit and another at a $5,000 loss, you won't owe any capital gains tax. For this reason, if you do decide to sell your stock at a profit, it could be a smart time to check your portfolio for any losing stock positions that you wouldn't mind getting rid of -- a strategy known as tax-loss selling.
If none of these situations apply to you, you probably can't avoid paying capital gains tax.
Offer from The Motley Fool: The 10 best stocks to buy nowMotley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. In fact, the newsletter they run, Motley Fool Stock Advisor, has tripled the S&P 500!*
Tom and David just revealed their ten top stock picks for investors to buy right now.
*Stock Advisor returns as of Sept. 5, 2017.
The Motley Fool has a disclosure policy.