Tesla (TSLA +2.71%) completed its second stock split after close of trading on Aug. 24. If you had one share of Tesla in your account before the stock split, you now have three whole shares of the electric vehicle maker sitting in your account.
Although it may be tempting to sell your extra shares, there's something you should consider before making your move: taxes. Selling your Tesla shares for a profit could trigger a taxable event.
Image source: Getty Images.
The story behind stock splits
Stock splits have become very popular in 2022, but they don't always lead to profits.
A stock split multiplies the number of shares a company has outstanding while keeping the current value of the shares the same. Although a company's stock price has the potential to jump after a stock split, that isn't always guaranteed.
Let's look at the mechanics of a stock split. Tesla's stock was trading around $900 before the stock split. Since Tesla pursued a 3-for-1 stock split, the stock price dropped from approximately $900 to $300 per share. If you had 1 share of Tesla in your account, you would have 3 shares worth a total of $900 after the stock split.
Although you have more shares in your account after a stock split, you won't have to worry about taxes -- unless you sell your additional shares for a profit.
What happens if you sell your extra shares of Tesla?
Let's say you have 3 shares of Tesla in your account before the stock split. After a 3-for-1 split, you'll wake up to nine shares of the company stock.
Stock splits can be an exciting time for investors as you watch your shares multiply overnight. However, if you sell your shares for more than you paid for them and you hold them in a regular taxable account, you'll have to consider capital gains taxes.
Capital gains taxes can be divided into two flavors: short-term or long-term. If you get caught in the short-term capital gains bucket, you'll have to pay the same taxes you pay on income earned from working a job. The ordinary income tax rates could be as high as 37%. You'll only have to worry about these rates if you held your stocks for a year or less before selling them.
Get a better deal on your Tesla tax bill
The best tax rates are reserved for investors who hold on to their stocks for over a year. If you bought your shares of Tesla in 2020 and sold a portion of your shares after Tesla's second stock split, you'll qualify for the long-term capital gains rates.
Being a patient investor will grant you access to the 0%, 15%, and 20% long-term capital gains rates. If you're thinking about selling shares, take a look at these capital gains tax rates below.
2022 Long-term Capital Gains Tax Brackets
|
For single filers with taxable income of... |
For married joint filers with taxable income of... |
For heads of households with taxable income of... |
...this is the long-term capital gains rate |
|---|---|---|---|
|
$0 to $41,675 |
$0 to $83,350 |
$0 to $55,800 |
0% |
|
$41,676 to $459,750 |
$83,351 to $517,200 |
$55,801 to $488,500 |
15% |
|
Over $459,750 |
Over $517,200 |
Over $488,500 |
20% |
Table source: Author. Data Source: IRS.
Don't push taxes to the curb
After a 3-for-1 stock split, your account can quickly go from five shares to 15 shares. If you sell your extra shares for a profit, get ready to report your gains during tax time.
However, you can avoid taxes this year by holding on to your extra shares of Tesla. If the company continues to do well and the stock goes up, you'll position yourself to enjoy greater profits later.
