Question: I'm thinking about selling some stocks that have done well and re-investing the money. Will I be required to pay taxes?

August Thompson

Answer:

Dear Mr. Thompson,

Yes. If you have a profit you must pay what is called a capital gains tax.

The amount you wind up paying is based on two factors: one, your income tax bracket and two, how long you have held the stocks.

The official length of ownership is based on the trade date - that is, the day you gave your buy or sell order to BUYandHOLD and not the settlement date (the day when ownership changed hands).

Stocks held more than one year

The IRS considers assets held longer than one year to be long-term investments and looks more favorably upon them than upon assets held less than one year.

In May of 2003, Congress lowered the long-term capital gains tax rate from 20% to 15% for those investors in the higher income tax brackets and from 15% to 5% for those in lower brackets.

The current tax brackets are: 10%, 15%, 25%, 28%, 33% and 35%.

The 5% long-term capital gains tax on applies to taxpayers in the 5% and 10% brackets. The 15% long-term capital gains tax applies to those in the 25%, 28%, 33% and 35% brackets.

Originally, these capital gains tax rates were set to expire at the end of fiscal year 2008. Then, in 2006, Congress passed a two-year extension, keeping these favorable rates in place through 2010.

Stocks held less than one year

When you sell a stock held less than one year, this is regarded by the IRS as a short term sale. Profits will be taxed at the same level as your ordinary income, which could be as high as 35%.

$TIP: If you fall into the 5% and 15% brackets and you sell shares held one year or longer in 2008, there will be no capital gains tax on these sales.

So, as you can see, the tax code clearly favors investors who buy and hold their stocks for longer periods of time.

For More Info:

• For IRS updates, go to: www.irs.gov
  
  
• For a capital gains calculator, go to: www.moneychimp.com

Good luck!