It's generally a good idea to load your brokerage account with quality stocks and hold them for many years. That way, over time, your shares can gain value.
But there may come a time when you decide to sell a stock quickly after buying it. Let's say you purchase shares of a given company, and suddenly, a week later, positive news sends the price soaring. You know that higher price is likely unsustainable, so you decide to sell while that stock is trading at a high to maximize your profits.
Any time you sell stocks at a price that's higher than what you paid for them, you're liable for taxes on your capital gains. But when you sell stocks at a profit a week after buying them, your capital gains tax bill is even higher.
Your timing matters
Capital gains taxes on investment are grouped into two categories -- long-term gains and short-term gains. Long-term gains apply to stocks you hold for at least a year and a day prior to selling them. Short-term gains apply to stocks you hold for a year or less.
And to be clear, it doesn't matter whether you sell your stocks after one week, one month, or one year. If you don't hold your stocks for a year plus one day, you'll land in the short-term capital gains category.
Why does it matter? It's simple. The gains category you fall into will dictate what your tax bill will look like.
Short-term capital gains are taxed at a less favorable rate than long-term gains. In fact, they're taxed at the same rate as your ordinary income.
So, let's say you sell your stocks at a profit and make $1,000. If you're single and earning $100,000 a year, that puts you in the 24% tax bracket for short-term gains as well as ordinary income. (This doesn't mean that every dollar of income of yours is taxed at 24%, but rather, your higher dollars of earnings.) Based on this, your $1,000 short-term gain would result in a $240 tax bill.
Long-term capital gains, by contrast, are subject to lower tax rates. If you're single earning under $44,626, you actually won't pay any taxes on long-term gains. If you're single earning between $44,626 and $492,300, you'll pay 15%. And if your earnings exceed $492,300, you'll pay 20%.
So in our example, let's say you were looking at long-term capital gains rather than short-term gains. Your tax bill in that scenario would only be $150, compared to $240 for short-term gains.
Sometimes, it pays to wait
Under certain circ*mstances, it can make sense to sell a stock at a profit before you've held it for a year and a day or longer. But if there's not a compelling reason to sell sooner, then it's generally best to try to bump yourself into the long-term capital gains caretory to minimize the tax hit involved. After all, why pay the IRS more money than you have to in the course of selling a stock?
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FAQs
Any time you sell stocks at a price that's higher than what you paid for them, you're liable for taxes on your capital gains. But when you sell stocks at a profit a week after buying them, your capital gains tax bill is even higher.
How soon after selling a stock for profit can you buy it back? ›
The first, most obvious thing to do is to avoid buying shares in the same stock within 30 days before or 30 days after selling. If you do, you lose the ability to harvest a tax loss on the number of shares you purchase.
Can I sell stock after 1 week? ›
You can start selling your holdings right away if these shares do not belong to the T2T (Trade-to-trade) category.
Can I sell a stock for a profit and buy again the same day? ›
Just as how long you have to wait to sell a stock after buying it, there is no legal limit on the number of times you can buy and sell the same stock in one day. Again, though, your broker may impose restrictions based on your account type, available capital, and regulatory rules regarding 'Pattern Day Traders'.
What happens when you sell stock for a profit? ›
If you sell stocks for a profit, your earnings are known as capital gains and are subject to capital gains tax. Generally, any profit you make on the sale of an asset is taxable at either 0%, 15% or 20% if you held the shares for more than a year, or at your ordinary tax rate if you held the shares for a year or less.
What is the 30 day wash rule for stocks? ›
Q: How does the wash sale rule work? If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.
What is the 30 day rule for capital gains? ›
1) Use or lose the annual CGT allowance
If you do this within 30 days, then you would be deemed to have bought it back at the original cost and not realised any gains. This tax avoidance rule is sometimes known as the 'bed and breakfast' rule.
What is the 3-5-7 rule in trading? ›
A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
What is the 10 am rule in stock trading? ›
Some traders follow something called the "10 a.m. rule." The stock market opens for trading at 9:30 a.m., and the time between 9:30 a.m. and 10 a.m. often has significant trading volume. Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour.
What is the 8 week rule in stocks? ›
If your stock gains over 20% from the ideal buy point within 3 weeks of a proper breakout, hold it for at least 8 weeks. (The week of the breakout counts as Week No. 1.) If a stock has the power to jump over 20% very quickly out of a proper base, it could have what it takes to become a huge market winner.
The Bottom Line
This method is employed as a means of lowering the investor's taxable income. To avoid triggering the wash sale rule, an investor can employ a strategy such as buying more of the stock that they'd like to sell, holding on to the new stock purchase for 31 days, and then selling it.
When should you sell a stock for profit? ›
If market conditions are choppy and decent gains are hard to come by, then you could exit the entire position. But if the market winds are favorable and your stock appears to be still in the early stages of its run, then go ahead and sell at least part of the position, such as a third or half, to lock in gains.
Can you buy a stock and sell it a week later? ›
Your timing matters
And to be clear, it doesn't matter whether you sell your stocks after one week, one month, or one year. If you don't hold your stocks for a year plus one day, you'll land in the short-term capital gains category.
How soon can I sell a stock after buying it? ›
Retail investors can buy and sell stock on the same day—as long as they don't break FINRA's PDT rule, adopted to discourage excessive trading.
How do you cash out profit from stocks? ›
Stocks can be cashed out by selling them through a broker on a stock exchange. Selling stocks can provide cash for major expenses or to reinvest in other assets.
When can you repurchase a stock after selling it? ›
A wash sale occurs when an investor sells an asset for a loss but repurchases it within 30 days. The wash-sale rule applies to stocks, bonds, mutual funds, ETFs, options and futures but not yet to cryptocurrency.
Can I sell a stock and buy another immediately without paying taxes? ›
Within an IRA, 401(k), or other tax-favored retirement account, you can make sales of stock or other investments without any immediate tax consequences at all. You can then reinvest those proceeds in new stock. Only once you make withdrawals from your retirement account will tax issues come into play.
Can I sell a stock and buy it back cheaper? ›
Short Selling Example
To recap, the object of short selling is to sell a stock and then buy it back at a lower price. The profit is the difference between those two prices.
Is there a wash sale rule for gains? ›
If you have a loss from a wash sale, you can't deduct the loss on your return. However, a gain on a wash sale is taxable.
