Here's What Happens When You Sell a Stock in Your Brokerage Account at a Profit

The whole point of investing is to make money -- at least over time. But there may come a point when you decide to sell a stock for a price that's higher than what you paid for it.

Generally, it's a good idea to hold stocks in your brokerage account for many years so your shares can appreciate in value over time. But a company or market event could make it so the value of a given stock of yours shoots up overnight. And if you're not sure that higher price is sustainable, then it could pay to sell your shares right away, when you know you're able to profit.

When you sell shares of stock for a higher price than what you paid, you're liable for capital gains taxes. But the amount of time you hold your shares before making that sale will determine what your tax bill actually looks like.

Be mindful of when you sell

The upside of holding stocks in an IRA account is that you're not taxed year after year on gains in your account. Rather, those gains are tax-deferred, so you don't pay taxes on them until you're ready to take withdrawals from your savings.

But brokerage accounts work differently. Since these accounts don't come with the same strict rules as IRAs (like imposing annual contribution limits and penalizing you for taking withdrawals prior to age 59 1/2), they also don't give you a tax break on your money. So if you sell stocks at a profit in a regular brokerage account, you face a tax bill for the year you make your profit. In other words, if you sell stocks at a profit this year, you'll owe more on your 2023 taxes.

Now, the amount of tax you'll owe will depend on how long you hold your shares. If you hold your stocks for a year or less, you'll land in the short-term capital gains tax category. And your tax rate on your gains will be the same as your ordinary income tax rate. 

So, let's say you're single earning $80,000 a year. That puts you in the 22% tax bracket, which means that's the amount of tax you pay on your highest dollars of income. If you sell stocks you bought for $1,000 for a price of $2,000, you'll have a $1,000 profit. You'll then be taxed at a rate of 22%, making your tax bill from that sale amount to $220.

But things are different if you hold your stocks for at least a year and a day prior to selling. In that case, you'll be bumped into the more favorable long-term capital gains tax category.

Long-term capital gains taxes also depend on your income. But the rates are much lower than what you'll pay on short-term gains.

If you're single earning $44,625 or less, you actually won't be taxed on long-term capital gains at all. And if you're single and earning between $44,626 and $492,300, your tax rate will be just 15%. Long-term capital gains taxes top out at 20% for singles earning $492,300 or more. 

So let's go back to that $1,000 gain from the above example. Your $80,000 salary puts you in the 15% bracket for long-term capital gains taxes. That would leave you owing $150 on the sale of your stock, not $220. 

Know the tax rules

In some cases, it really can pay to sell a stock right away at a profit, no matter the tax implication. But let's say you're eager to sell a stock at a profit that's been relatively stable, and you've held it for 359 days. Waiting a week to lock that sale in could result in a much lower tax bill.

That's why it's important to know how capital gains taxes work, and to be mindful of your stock purchase dates before selling shares. Doing so could save you a lot of money.